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Fitch: Nigeria, others risk downgrade if oil doesn’t recover

By BusinessNews Staff on January 17, 2015

There are likely to be credit rating downgrades for Nigeria and other oil producing countries if prices of crude oil do not recover, global rating firm, Fitch said yesterday.
“If oil prices fail to recover from current lows, it is likely that there will be further ratings actions on oil-producing countries,” Reuters quoted one of Fitch’s top sovereign analysts, Ed Parker, to have said at a conference.
“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,” he added.
Meanwhile, despite efforts by the Central Bank of Nigeria (CBN) to prop up the naira in the face of the dwindling prices of crude oil, some international investors have predicted that the nation’s currency may plunge to about N234 to a dollar in the next 12 months if oil prices fail to rebound.
The prediction, according to a report by the Financial Times was revealed by non-deliverable forwards (NDFs).
Non-deliverable forwards are outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities.
Oil prices is currently hovering around $46 a barrel. The central bank last November devalued the naira from N155/$1 to N168/$1.
In addition, it had widened the band around the midpoint by 200 basis points from +/-3 per cent to +/-5 per cent and has continued to adjust the forex trading rules in a bid to save the naira.
But the naira has remained largely volatile, mostly at the interbank and bureau de change markets and has consistently traded above the upper limit of the official trading band.
The CBN has continued to intervene heavily in the market to slow down the depreciation.
The naira fell 1.2 per cent to close at N185.60 to a dollar despite the central bank intervening with dollar sales to try to prop up the currency, dealers said.
The nation’s currency opened at N183.40 to the greenback, the same level it closed at the previous day. But quickly weakened to an intra-day low of N186.30 in thin trade, prompting the central bank to intervene, dealers said.
The CBN yesterday asked 21 commercial lenders to bid for $500,000 each, in an intervention move aimed at providing liquidity to the interbank market and supporting the naira, which has been hard hit by falling global oil prices.
“I think central bank will try to control any uptrend in the currency, to provide liquidity to the market. But for how long is the question,” one dealer told Reuters.
To this end, the Financial Times report pointed out that Nigeria is weathering a growing economic storm, with the cost of international borrowing surging above neighbouring African nations because of the impact of lower oil prices, Boko Haram attacks, and political uncertainty ahead of elections.
The report also described the situation in the forex and fixed income markets as bad news for President Goodluck Jonathan.
Goldman Sachs, the biggest commodities dealer in Wall Street, slashed its forecast for crude oil to as low as $40 a barrel in the first half of the year.
“While for many African economies the reverberations from this state of affairs are positive on the external balance and inflation fronts, for the oil producers (such as Nigeria) it still represents a tide of woe,” Africa analyst at Johannesburg-based consultancy ETM Analytics, Gareth Brickman said.
Brickman said that with support for the naira abating after strong US dollar sales in the local market, the pressure will increase on Nigeria’s central bank to use its reserves in “questionable support” of the currency.
The CBN on Monday reviewed upward the daily foreign currency trading positions of banks from zero per cent to 0.1 per cent. In addition, banks are now required to utilise funds purchased from the autonomous foreign exchange market within 72 hours instead of 48 hours.