Nigeria Oil Reliance Weighs on ‘Positive’ Bank Bailouts, S&P’s Esters Says

Nigeria’s “positive” 2009 bailout of lenders and reduction of nonperforming loans in the banking industry is being outweighed by its dependence on oil and continuing social unrest, according to Standard & Poor’s.

“The banking sector has undergone a significant transformation in the last two years,” Christian Esters, a Frankfurt-based credit analyst at S&P, said in a phone interview yesterday. “What holds the rating down is the remaining political uncertainty, it is also the dependence on the oil sector, prices and the low level of economic development generally.”

S&P lowered the credit rating of Africa’s biggest oil producer to B+, the fourth-highest junk rating, with a “stable” outlook in August 2009. That’s the same month the Central Bank of Nigeria injected 620 billion naira ($4.1 billion) into 10 lenders and fired the chief executives of eight of the country’s 24 banks after a debt crisis that was spurred by loans to equity speculators.

The central bank set up Asset Management Corp. of Nigeria, or Amcon, in 2010 to buy nonperforming loans from lenders. Amcon took over and injected 679 billion naira into Afribank Plc, Bank PHB Plc (PLATINUM) and Spring Bank Plc (SPRINGBK) on Aug. 6 after the central bank revoked their licenses the day before, saying they were unlikely to meet a Sept. 30 deadline to recapitalize.

“The banks’ asset quality has markedly improved since Amcon relieved the banks of the bad loans,” Esters said. “The ratio of nonperforming loans has been brought down quite a lot by this measure.”

Oil Reliance

Nigeria relies on crude exports for 95 percent of its foreign-exchange earnings, making it vulnerable to oil-price swings, said Esters. The nation’s foreign-currency reserves, which have dropped 5.7 percent to $35 billion as of Aug. 10 from a year earlier, could have risen more, he said.

Nigerian benchmark Bonny Light crude headed for its third weekly retreat on concern that Europe’s debt crisis and slower U.S. growth will reduce demand for fuel consumption. The spot price has increased 4 percent since January and last traded 0.8 percent down at $109.49 a barrel. The 2011 budget of 4.5 trillion naira is based on a crude-oil price of $75 a barrel.

“The oil price assumption in their budget of $75 gives them a little bit of flexibility to falling global prices, but Nigeria is exposed to oil exports, prices and quantities,” Esters said. “Their budget is exposed so their balance of payments and current account is exposed to oil prices.”

Eurobonds Drop

The price of Nigeria’s 6.75 percent Eurobonds due 2021 fell for a seventh day, losing less than 0.1 percent to 103 cents on the dollar, as of 4:37 p.m. in London. The notes headed for a weekly slump of 3.4 percent, the biggest five-day decline since their January issue. The yield rose to 6.323 percent, according to data compiled by Bloomberg, the highest since April 28. The $500 million of bonds are Nigeria’s only international notes.

Africa’s most populous nation remains plagued by violence and political uncertainty even as April elections that returned Goodluck Jonathan to power went “fairly well,” Esters said.

Boko Haram, an extremist Islamist sect, has claimed and been suspected of multiple bomb and gun attacks. Nigerian authorities have blamed the group, which draws inspiration from Afghanistan’s Taliban movement, for an upsurge in violent attacks in the mainly Muslim north in the past two years.

Social Tensions

Violence is being fueled by “economic division and cultural division; it’s probably some dissatisfaction in the north regarding the Jonathan decision to run for the elections,” Esters said. Jonathan, a Christian from the oil- rich southern Niger River delta region, succeeded Muslim northerner, Umaru Yar’Adua, who died in May last year. Jonathan defied a party rule that made it the north’s turn to produce a presidential candidate. Nigeria, which has an estimated population of 155 million, is divided between a mainly Muslim north and largely Christian South.

“We expect social tensions to continue and we expect incidents of violence to continue, including in the Niger Delta, though there has been the amnesty and Jonathan himself is from the Niger Delta, so that may help to keep things calm,” said Esters.

A government amnesty in August 2009 ended most of the fighting in the oil producing Niger River delta and disarmed thousands of militant fighters, after attacks by armed groups cut more than 28 percent of oil output between 2006 and 2009, according to data compiled by Bloomberg.

To contact the reporter on this story: Chris Kay in London at ckay5@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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