One consequence of the current crisis is that bad loans in Nigeria’s banking sector are likely to rise sharply. While the government would surely respond to problems at individual banks with capital injections (as it did in 2009), this would add to the country’s fiscal woes.
- One consequence of the current crisis is that bad loans in Nigeria’s banking sector are likely to rise sharply. While the government would surely respond to problems at individual banks with capital injections (as it did in 2009), this would add to the country’s fiscal woes.
- The 2008-09 Global Financial Crisis (GFC) triggered a full-blown banking crisis in Nigeria. The NPL ratio jumped to 40% and the public sector had to recapitalise banks.
- During this current crisis, Nigeria’s banking system doesn’t (so far at least) seem to have come under significant strain. Although interbank interest rates jumped in late March – suggesting that liquidity conditions tightened and that counterparty risk may have spiked – these rates have since come down. And while bank stocks have underperformed the broader equity index, the difference hasn’t been large.
- Several factors have helped. Banks have reduced their non-performing loan (NPL) ratios significantly in recent years. What’s more, forbearance measures introduced by the central bank (CBN) as well as direct loan provision to the private sector by the CBN itself may have reduced risks of a renewed rise in bad debt. More generally, in contrast to the GFC, when high oil prices fuelled a credit boom and deterioration in lending standards, this crisis comes on the back of a period of weak credit growth. (See Chart 1.)
- Even so, risks in the banking sector look high. First, the sheer scale of the fall in output will lead to difficulties in servicing debts. We think that GDP in Nigeria will fall by 3% this year, the worst outturn since the country’s financial crisis in the 1980s. What’s more, the economy will only pull out of this downturn slowly – even if the coronavirus can be brought under control swiftly. (See our Africa Outlook.)
- Second, around a quarter of total bank lending is directed towards companies in the oil and gas sector (both upstream and downstream), which will be suffering a dramatic loss of income. (See Chart 2.)
- And third, the collapse in oil prices will put pressure on the currency and may lead to a rise in bad loans. Close to 40% of bank lending is denominated in foreign currency. The data on this are patchy, so we don’t know which sectors are most exposed to FX borrowing (and might have a hedge via export revenues). But even so, a weaker currency will make it harder for borrowers to service their debts.
- It is difficult to predict how far NPLs will rise during this crisis. However, it would only take a rise in the NPL ratio to about 12% (from the latest reported level of 6%) to take the banking sector’s aggregate capital ratio below 10% (the regulatory minimum for banks without an international licence; for international banks, the minimum is higher, at 15%). Despite the CBN’s efforts to limit the fallout, this hardly seems implausible given the scale of the economic damage from the coronavirus outbreak.
- The costs of recapitalising banks would not be particularly large. Low levels of financialisation mean that outstanding private sector credit only stands at 12% of GDP. But given the fall in oil revenues and the demands on the public purse for higher health care spending, bank recapitalisations would be particularly unwelcome. Were banks to run into trouble, the government may need to seek additional external help. Some form of moratorium on debts owed to private creditors wouldn’t be out of the question.
Chart 1: Total Credit (% y/y)
Chart 2: Private Sector Credit by Sector (% of Total)
Sources: Refinitiv, Capital Economics
William Jackson, Chief Emerging Markets Economist, firstname.lastname@example.org