The Central Bank of Nigeria, CBN, has warned that financial institutions in Nigeria will be at grave risk in 2015 due to the low prices of crude oil in the international market and their huge exposure to oil and gas firms.
The CBN, in its Financial Stability Report for December 2014, stated that oil and gas firms owe financial institutions about N3.24 trillion, adding that low crude oil prices will pose a significant risk to Nigeria’s financial system and might lead to an increase in Non-Performing Loans, NPL.
According to the CBN, sustained low oil prices may, however, result in an increase in NPLs, given that the exposure to the oil and gas sector accounted for 25.70 per cent or N3.24 trillion of the total credits of N12.63 trillion at end-December 2014.
The CBN said: “Anticipated sources of risk in the financial system in the first half of 2015 would include declining crude oil prices, due to United States’ shale oil and gas production and the resultant pressure on the naira exchange rate.
“Others include a reversal of capital flows, owing to improvements in the US economy and the adverse implications for the capital market; a possible increase in non-performing loans; security challenges in parts of the country.
“There are equity market losses that might linger as a result of low investor confidence; uncertainties associated with the 2015 general elections; and an upward inflationary pressure from election spending and an expected increase in electricity tariffs in the first half of 2015.”
The CBN, however, advised banks to strengthen their contingency plans and conduct regular stress tests so as to be able to mitigate the impact of the crash in oil prices on their balance sheets.
“In light of the above, the CBN, in collaboration with relevant stakeholders, will continue to take appropriate measures designed to ensure sustained financial system stability,” the apex bank stated.
Commenting on the report, Deputy Governor, Financial System Stability of the CBN, Mr. Joseph Nnanna, said the decline in the prices of crude oil triggered a number of negative consequences for the Nigerian economy in the second half of 2014.
According to him, the period – June to December 2014, was characterised by macroeconomic shocks in the Nigerian economy as a result of heightened political activities and dwindling government revenue occasioned by the rapid decline in the international price of crude oil.
Also commenting, the CBN Governor, Godwin Emefiele, said, “During the second half of 2014, which this edition of the Financial Stability Report covers, there were remarkable developments in both the domestic and global economy.
“On the positive side, we have seen strong GDP growth and declining unemployment in the United States, weakening inflationary pressures in Europe, and rebound of growth in the United Kingdom.
“On the negative side, many policymakers and governments around the world have been grappling with sustained and significant fall in oil prices, the end of the U.S. Federal Reserve’s Quantitative Easing Programme, and the effects of US-led sanctions on Russia for its alleged role in the ongoing Ukrainian conflict.
“On the domestic side, we have witnessed direct spillovers into our economy from the negative shocks mentioned above. These spillovers include exchange rate pressures, decline in government revenue, capital reversals, and dwindling accretion to foreign reserves.”