Even as Nigeria’s Naira has dropped further by 2 percent to a new record low against the dollar in early trading last week, experts in the oil and gas downstream sector have set that the sector will be badly hit by the on-going instability in exchange rates which was occasioned by falling crude oil prices.
Even as Nigeria’s Naira has dropped further by 2 percent to a new record low against the dollar in early trading last week, experts in the oil and gas downstream sector have set that the sector will be badly hit by the on-going instability in exchange rates which was occasioned by falling crude oil prices.
Shipping Position Daily recalls that, in order to ensure the Naira exchange rate stability and forestall the dangerous impact of the falling oil prices in the international oil market on the Nigerian economy, the Central Bank of Nigeria had reduced the official naira-to-dollar exchange rate to N178/$1, forcing down the currency by N23, down from N155/$1.
In a chat with our correspondent last week, downstream expert and Operations Manager of First Deepwater Offshore Logistics Petroleum Tank Farm, Mr. Sunday Okpithe, noted that Nigeria being an import-dependent nation, especially in the importation of oil, the currency devaluation will adversely affect the downstream sector in Nigeria.
Okpithe told Shipping Position Daily that the situation will eventually lead to a drastic reduction in the way banks lend money to fuel marketers, considering the unpaid subsidies. The devaluation will also reduce the workforce of the downstream sector and Nigerians in general; this is because working abroad will now become very attractive as the naira is losing its value.
“When the Naira is devalued, everything becomes unstable, not only in the oil sector, but i know for sure that it will affect the downstream sector, with this, people will now begin to travel abroad because it will be very attractive now to work outside the country where they pay you in dollars and it becomes so much money back home, this will affect our workforce” he said.
Our correspondent also learnt that the value of outstanding subsidy payments to oil marketers is about N300bn, which the Federal Government promised to clear half of this amount before the end of the year.
The implication of these delays is that the banks intermittently halt lending to the petrol importers when their subsidy debts reach internal limits, which has often led to queues in the country.
One reason for the uncertainty of the downstream sector is that for the bills of laden executed before the devaluation, the subsidy repayment will be based on the pre-devaluation exchange rate and only bills executed after the devaluation will be refunded using the devalued exchange rate. This implies that the company bears the loss of the devaluation.
Devaluation would also raise the cost of petroleum imports and also it would hurt helpless consumers who would see the value of their income eroded. It would be recalled that Nigeria’s economy is heavily dependent on oil, which accounts for about 80 to 90 per cent of its foreign exchange earnings.
Other industry stakeholders in a chat with our correspondent advocated the need for the government, especially the states, to look inwards and build up their Internally Generated Revenue drive by exploring non-oil productive activities within their domains in view of the uncertainties of distributions from the Federation Accounts in the months ahead.
Also, in the December 1st 2014 research note by Renaissance Capital (RENCAP) a leading Russian investment banking firm, Nigerian Lenders are evaluating their exposures to various sectors as oil slumps and the naira tumbles.
“Stanbic believes that the downstream sector is where there could be significant pressure from devaluation. Exposures to currency risk here are typically short-tenured and of a trade nature, with revenues coming in before exposures are due to be paid,” said Renaissance Capital SSA bank analyst, Adesoji Solanke, in a note released December 01.
From Rencaps discussions with GTB, the bank believes, “There are risks in the downstream book because the margins to these businesses are quite thin and could get eroded by currency devaluation.”
The downstream sector is likely to be the most stressed sector in the event of a devaluation, given the currency mismatch, according to Diamond Bank management.
“Alongside other sectors that are affected by currency movements, the bank has a structure in place to convert the FX loans to naira, once the exchange rate reaches a certain limit, ,” the banks management said, according to Rencap.
For Skye Bank the “Downstream is a key risk area in the event of a currency devaluation. The bank ensures that it funds businesses with off-take agreements, or that retailers have a tank farm.”
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