Unless oil price begins to recover very soon in the international
market, there are indications that Fitch Rating may downgrade the
sovereign credit rating of Nigeria and other global crude oil producers.
Reuters, on Thursday, quoted Ed Parker, one of Fitch’s top sovereign
analysts as saying at a conference in London that “if oil prices fail to
recover from current lows, it is likely that there will be further
ratings actions on oil-producing countries.”
Majority of these
countries, including Nigeria, belong to the Organisation of Petroleum
Exporting Countries (OPEC), a cartel, which is led by Saudi Arabia,
Kuwait and Qatar. There are non-members like Russia, United States,
Canada and China, among others.
Parker said: “What would it take
for us to downgrade…Russia? It would really be more of the same – if oil
prices fail to recover from current lows, if we see an even deeper and
longer recession and we see more financial sector turmoil.”
Speaking at the London Credit Outlook 2015 Conference, James McCormack,
Global Head of Sovereign Ratings at Fitch, noted that “oil prices are a
net positive for global growth and are pushing inflation rates lower,
but are not expected to prevent a divergence of monetary policies in the
U.S. and the Eurozone.
For emerging markets with high levels of
U.S. denominated debt, this is a key issue as prospects for Fed
tightening and the continued strong dollar this year leave them more
exposed.”
On the corporate sector outlook, Mike Dunning, Head of
EMEA Corporate Ratings, expects that “despite weak growth in Europe,
EMEA’s corporates remain well positioned as credit metrics gradually
improve against a backdrop of strong bond issuance and a continued cheap
funding environment.
“The downside risks of deflation, weak oil
and commodity prices and currency devaluation will likely have the
biggest impact on emerging market issuers and cyclical peripheral
corporates,” he stated.
Increasing mergers and acquisitions
activity may become a key feature this year, “as well positioned
corporates consolidate weaker players, but we expect management teams to
remain prudent on M & A leverage, balancing debt funding with
equity and using hybrids.
“The high-yield and leverage loan markets will continue to be driven by cheap refinancing and M & A demand.
“The bond market will likely remain the more cautious and volatile.
High yield bond investors will favour stronger credit stories in
non-cyclical sectors over weaker, highly leveraged cyclically exposed
credits.”
Also speaking at the conference, Bridget Gandy, Co-Head
of EMEA Financial Institutions, says Fitch may downgrade as many as 50
EU banks, about a third in the first half of 2015.
Changing
sovereign support dynamics, she added, “mean that there is currently an
unusually high proportion of EU banks’ Long-term IDRs on negative
outlook. The Bank Recovery and Resolution Directive (BRRD) is being
implemented at national level and, for eurozone countries, the Single
Resolution Mechanism (SRM) will transfer resolution decision-making to
an independent, supra-national body from January 2016.
“Although
the sovereign support story is dominating our rating outlooks at the
moment, it is important to mention that we consider the intrinsic credit
worthiness of EU banks in general to be on a stable to improving trend.
“There are some exceptions, for example, some of Italy’s banks, where
deterioration in the operating environment is still working its way
through their asset quality and revenue numbers.”
Meanwhile,
Opeyemi Agbaje, Senior Consultant/Chief Executive Officer, RTC Advisory
Services Limited, on Thursday in Lagos said the ongoing fall in the
prices of crude oil at the international market calls for urgent
restructuring of the Nigerian economy by the Federal Government.
This type of restructuring, he said, is such that “you don’t have any
choice, but to do it. Analysts and columnists have over the years been
advising on most of these things, but now we don’t need to advise
anybody.”
Continuing, Agbaje who was reviewing performance of the
economy in 2014 and projections for 2015, at a forum organised by the
Finance Correspondents Association of Nigeria (FICAN), said “whether
government likes it or not, we will have to deal with the issue of the
Nigerian economy. We would have to diversify the economy, reduce the
size of government and increase investment in alternative sectors
whether we like it or not.
“The oil price is still falling and we don’t know where the exchange rate is heading to.
“But the reality is that whoever wins the election by February 14,
2015; and whoever comes into office by May, will have to deal with
serious economic issues.
“The implication of higher exchange
rate, higher interest rate, lower GDP growth, is lower consumption and
lower purchases of goods and services.
“So, there are also
possibilities of labour issues because both in private and public
sector, there may be an inclination towards job losses. So, the outlook
is going to be difficult. It is going to be a challenging outlook for
managers both in the private sector and in government.
“For the
private sector, this is the era in which managers will actually earn
their pay because they are going to now have to do their job. There is
significant uncertainty across variables.
“Now, there is nothing
that can be taken for granted. People have to plan for interest rate,
sales volume, exchange rate, political scenario and every other thing.
There is a high level of uncertainty.
“My description of where
Nigeria is in 2015 is multiple crossroads. So, we are at a junction in
which there are different roads. It is a potential explosive combination
of political risk, economic uncertainty and a seeming social crisis. It
is not the place a country wants to be in 2015.
“Essentially,
this is an era that would challenge the acumen of managers in the
private sector and in the government,” he stressed.
He also spoke
of the need for the government to initiate policies and incentives that
would encourage the country’s non-oil exports, admitting that Nigeria
has so far “achieved significant diversification in terms of local
production and consumption, but we are not competitive in exports.
“South Africa’s exports revenue is driven by South African companies
such as MTN, DSTV, South African Breweries, and a lot of other
companies; it is not the sale of commodity.
“So, the challenge
for the Nigerian economy is for government to create policies and
incentives that will allow our private sector to become exporters. If
our export revenue was earned by thousands of Nigerian companies
exporting their services, we would not collapse anytime the price of oil
falls,” he said.
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