The coronavirus pandemic will impact the finances of state governments, performance of businesses, purchasing power of households and weaken the quality of assets in the banking sector, a new report by Agusto & Co. has predicted.
Analysts at Agusto in the report released on Friday identified the key sectors that would be impacted as the upstream oil and gas sector, real estate, construction, transportation and non-essential manufacturing.
According to the report on Nigeria’s outlook in view of COVID-19, the sectoral distribution of the banking industry’s loan portfolio will also determine the extent to which asset quality will deteriorate in the near term.
“Although the degree of the impact will vary across different sectors, key sectors that will bear the brunt are oil and gas (upstream and services), real estate, construction, transportation (aviation) and manufacturing (non-essentials), “ the research and credit risk management firm said.
Agusto & Co highlighted reasons why the industry’s exposure to vulnerable sectors threatened asset quality in the short term.
“Firstly, the decline in global crude oil prices elicited by a slump in demand (due to economic lockdowns in several countries) will result in lesser revenues for oil and gas firms and the government as crude oil proceeds account for about 60 per cent of the sovereign’s revenues and 95 per cent of the country’s export proceeds,” it said.
The report added, “Being the largest spender, a decline in the government’s revenues has a ripple effect on key sectors such as construction, manufacturing, real estate and general commerce.
“In addition, the Central Bank’s ability to defend the naira is threatened by lower foreign currency revenues, which results in weaker macroeconomic indicators such as high inflation and currency depreciation and directly affects businesses and households.
“The recent Organisation of Petroleum Exporting Countries quota adjustment – leading to supply cut – are aimed at easing pressures from the oil supply side to some extent.”
The research company estimated an average crude oil price of $30 to $35 per barrel, since in the first quarter of the year, crude oil averaged $55.9 per barrel.
The report added, “Secondly, an anticipated further devaluation of the naira will bloat the Industry’s foreign currency loan book, which is dominated by the oil and gas, manufacturing, general commerce and other import dependent sectors. This could weaken capitalisation ratios via higher risk weighted assets and increase the level of delinquent foreign currency loans.
“Thirdly, the disruption in the global supply chains is expected to increase demand for domestic alternatives for inputs used in the manufacturing sector. While this is good for the domestic market, the higher cost implications will adversely impact the margins of producers as increased costs are not easily transferable to final consumers especially in a period of weakened consumer purchasing power.”
“Fourthly, the revenues of most businesses in the ‘non-essential’ manufacturing sectors will be hit by the general lockdown in the largest commercial centres in Nigeria.”
The company said with less than 8,000 tests carried out as of April 20, 2020, Nigeria was facing increasing uncertainties that could push the economy into recession with as high as seven per cent contraction in GDP in 2020.
