OIL PRICE ; NIGERIA MAY LOSE CREDIT RATING

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.