The debts owed by oil and gas companies to Nigerian commercial banks have surged by over 40% due to the recent weakening of the naira. This increase in debt represents over a quarter of the banks’ total credit to the economy. The rise in foreign currency-denominated debts is largely attributed to the significant devaluation of the naira in June. This situation poses potential risks to the banks’ loan books.
Key Points:
- Debt Spike in Oil and Gas Sector: The debt owed by oil and gas firms in Nigeria to commercial banks has increased by over 40% due to the recent devaluation of the naira. This surge in debt represents a significant portion of the banks’ total credit to the economy.
- Impact on Loan Books: While banks receive a positive valuation effect from the naira devaluation, their loan books might face challenges. Approximately 30% of total banking sector loans have been made in foreign currency. For borrowers whose income is in naira, servicing these debts becomes more expensive.
- Risks to Loan Book: The risks to the loan book are further exacerbated by the broader economic environment, characterized by weak growth, high inflation, and interest rates. This could lead to an increase in non-performing loans (NPLs).
- Government Measures: The Nigerian government is taking steps to reform the tax system, enhance collection efficiency, and remove barriers to business growth. These measures are aimed at broadening the tax base and generating additional revenue.
- Capital Adequacy and Risk Mitigation: Nigerian banks appear to be sufficiently capitalized and able to absorb potential loan losses. The capital adequacy ratio (CAR) is above the Central Bank of Nigeria’s (CBN) minimum requirement, providing a buffer against potential risks.
- Fitch Ratings Assessment: Fitch Ratings noted that naira devaluation would lead to an increase in banks’ foreign currency-denominated risk-weighted assets (RWAs), potentially putting pressure on capital ratios. It also highlighted potential impacts on problem loans and borrowers’ debt-servicing capacity.
Conclusion: The surge in debts owed by oil and gas firms in Nigeria, driven by the devaluation of the naira, presents challenges for both the financial sector and the broader economy. While banks have shown resilience, it’s essential to monitor potential risks to loan books and implement effective risk mitigation strategies. Additionally, ongoing government efforts to reform the tax system and enhance revenue collection are critical for Nigeria’s economic stability and growth.
