How COVID-19 worsened oil, aviation sectors’ N4.4tr debt

 How COVID-19 worsened oil, aviation sectors’ N4.4tr debt

• Concerns about CBN’s capacity to meet forex demand
• FAAN, others in distress over N6b monthly salary
• Naira heading to post-2016 era closes at N460/$1

The coronavirus pandemic has made the aviation and oil sectors more vulnerable to a huge financial crisis.

Already, operators and service providers in the two sectors are beginning to experience challenges in meeting their financial obligations to their staff, value-chain operators and financial institutions in terms of loan servicing.

Like the 2008/09 and 2015/16 financial crises that led to the near-collapse of the Nigerian banking industry, the slump in oil prices as a result of the COVID-19 pandemic may bring the country’s financial sector to its knees again, if the Central Bank of Nigeria (CBN) fails to look into the sector’s over N3.4 trillion exposure to local oil companies and about N1trillion to local airlines.

With the Brent Crude priced at $23.14 and Nigeria’s Bonny Light at $14.85 per barrel as at 3:45 p.m. local time, Nigerian banks with exposure to local oil firms and aviation sector, are presently experiencing difficulty in getting the companies to service their loans as indigenous oil firms need between $35 and $40 a barrel to remain in operation, unlike oil majors whose average cost of production is about $22 a barrel.

As a result of the debt profile of the banking sector, international rating agency, Moody’s reviewed the outlook for Nigeria’s banking system from stable to negative. According to Moody’s, Nigerian banks will face weakening loan quality and foreign currency liquidity challenges as depressed oil prices and the coronavirus pandemic weigh on the nation’s economy.

“We expect problem loans to rise to between 8 per cent and 10 per cent of total loans from 6 per cent in December 2019, with risk tilted to the downside, should the depressed oil price persist for more than a year. Loan restructuring and forbearance will lessen the impact of loan quality deterioration.

“The economy will remain sensitive to oil price movements because a large part of the country’s foreign currency earnings is derived from oil exports”, the agency added.

For the aviation sector, the lockdown and restriction of airspace movement have led to the grounding of about 120 domestic aircraft nationwide, leaving operators with no income but recurrent expenses.

Since assets seizure offers no reprieve for the banks, especially at a time when foreign inflows are projected to drop, banks may either have to stop charging interests on the loans or offer some moratorium until the firms can service the debts.

Similarly, there are palpable fears among businesses about the ability of the CBN to meet the demand for foreign exchange in the post-lockdown period, especially for the importation of petrol, food, meeting financial obligation among trade partners and for essential raw materials needed for local production.

Specifically, the worries border on the fact that oil prices are very low, below the revised budget benchmark, thereby impacting heavily on the government’s revenue in the absence of economic buffers. The latest World Bank report also projects a sharp decline in global remittances, a privilege being enjoyed by Nigeria and other countries on the continent.

With oil prices trading very low, the Federal Government is expected to slash production next month in line with the Organisation of Petroleum Exporting Countries (OPEC) quota, having discounted its official selling price for Bonny Light and Qua Iboe Crude oil as inventories rise amid a few buyers.

Like a replay of the 2016 era, deposit money banks have started reducing the debit card limits of customers for international payments that would be settled through dollar payments, while the post-lockdown economy is expected to witness increased demand for dollar for fuel importation by marketers and local manufacturers.

To manage the nation’s reserves in the face of declining revenue, the CBN may resort to rationing foreign exchange for import.

Yesterday, the naira exchanged against the dollar at N460 at the black market for the first time since February 2017. The currency was quoted at N386.33 on the spot market last Friday.

The CBN had earlier this year stated that gross external reserves remained sufficient in the short-to-medium term, cautioning that the level of import was weighing on the current account.

“Nonetheless, it is noteworthy that the composition of visible imports is changing predominantly to capital goods, raw material and durable consumer goods while strong diaspora remittances are expected to be a tailwind to mitigating potentially higher current account deficits in the short-to-medium term”, it added.

Meanwhile, aviation regulatory agencies and key service providers are in dire straits over the operating cost of facilities and payment of salary estimated in excess of N6 billion a month.

Without revenue in the last one month due to lockdown, sustaining the heavy overhead and keeping the critical facilities serviceable is already a tough call among the government parastatals.

Worst hit is the Federal Airports Authority of Nigeria (FAAN) that has the largest workforce spread across all 22 airports nationwide. With almost nothing generated in revenue in the last one month, FAAN will require Federal Government’s support to defray N4 billion monthly overhead costs.

Some stakeholders, apparently worried by the ugly state of the industry, have called on the Federal Government to support the airlines and agencies to stay afloat. Others, however, disagreed, saying the government should support only the agencies but not the airlines that are all private concerns.

About eight airlines, already struggling before the pandemic, have further sunk into financial distress with no revenue to pay aircraft leases, service providers and other creditors. Lately, almost all the airlines have sent over 80 per cent of workers on leave without pay, while the rest were made to put up with pay cuts.

Sources at the Ministry of Aviation and aviation agencies told The Guardian that even the aviation parastatals and their workers were badly affected by the cash crunch and worry about “where the April salary will come from.”

Only the Nigerian Civil Aviation Authority (NCAA), and the Nigerian Airspace Management Agency (NAMA) that is still running skeletal services, have paid April salaries by 22nd.

“The truth is that there is no much money anywhere, and I do not envy any of the chief executive officers of these agencies because they have operational costs to settle and salaries of their workers to pay.

“How much does FAAN have to pay anyone, without the government’s support? These are the people that should be talking to the government through the minister, but they have not been answered, not to talk of the airlines that are private concerns,” a director in the ministry said.

The Guardian learnt that the apex regulatory body, NCAA, requires an average of N750 million overhead cost per month; Accident Investigation Bureau (AIB) N350 million; Nigerian College of Aviation Technology (NCAT) N150 million; Nigerian Metrological Agency (NIMET) N290 million; NAMA over N500 million; and FAAN N4 billion to run its 22 airports in a month.

The agencies are funded both by Federal Government’s budgetary allocations and the Internally Generated Revenue (IGR) from passengers and operator-user charges. For instance, FAAN earns IGR from airport charges and passenger rates — N1000 on each local ticket and $50 on the foreign traveller. The other four agencies – NCAA, NAMA, NCAT, NIMET and AIB – earn from the five per cent Passenger Service Charge (PSC) and Cargo Service Charge (CSC).

In the absence of passengers’ movements, the agencies are left with FG’s allocation. The Guardian learnt that since the 2020 budget was reduced by as much as N1.5 trillion, the government has directed all aviation parastatals to cut expectations by 25 per cent.

“That tells you to expect very little in terms of allocations from the government. We are now left with 75 per cent (after 25 per cent reduction). Even in good times, the government only releases about 50 per cent of the budgeted funds to MDAs. So, the agencies are almost left with nothing,” a senior official with AIB said.

A close look at the movement in the country’s foreign reserves showed a fall in the reserves from $38.53 billion at the beginning of this year to $33.54 billion, as at last week Friday, representing a decline by $4.99 billion.

The Guardian had earlier reported that export of goods had become challenging while fresh imports and other financial obligations of shipping companies and terminal operators that required forex have been completely stalled, as banks continue to operate skeletal services, which exclude forex trading.

Although remittances are a small fraction of forex inflows, the World Bank Group President David Malpass warned that the ongoing economic recession caused by COVID-19 was taking a severe toll on the ability to send money home, adding that the bank was working to keep remittance channels open and safeguard the poorest communities’ access to these most basic needs.

Given the crisis which started in February 2020 and has gone on for three months now, already, a lot of upstream oil industry players are defaulting, and as global demand is not projected to increase significantly in May 2020, crude oil prices will remain low throughout this second quarter, putting Nigerian banks at risk of oil company’s exposure once again.

The Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said the oil and gas sector was one of the most vulnerable at this time.

“With the unprecedented slump in oil price, the commercial viability of oil production is clearly at risk. This would have dire implications for banks with high exposure to the sector. It is, therefore, necessary for some form of the rescue plan to be put in place to save the situation.

“There are two critical issues at stake- the sustainability of oil production as an investment and the risk to financial systems stability resulting from the looming loan defaults. Hopefully, this would not last for long. A short-term relief will not be out of place. As the global economy gets out of the challenges of the COVID 19 pandemic and countries ease the lockdowns, the outlook for oil sector will become brighter,” he said.

On forex scarcity, he said: “One of the major macroeconomic challenges we will face as a result of the COVID 19 crisis is that of sharp exchange rate depreciation, and possibly a bigger problem of liquidity crisis in the foreign exchange market. Exchange rate depreciation is clearly inevitable given the current realities.

“But a forex liquidity crisis should be easier to manage if there is a wider scope for market mechanism in foreign exchange allocation. There should be less resort to administrative rationing of forex. High dependence on rationing will only deepen the liquidity crisis in the foreign exchange market,” he added.

The Independent Petroleum Producers Group (IPPG), an association of indigenous exploration and production companies, through its Chairman, Ademola Adeyemi-Bero, while speaking on the effect of the pandemic on the industry, said that many oil firms had stopped production. He noted that oil and gas is a long-term business, even though the present dip is a bigger one as against what happened in 2015.

“We are cutting our costs and trying to do things differently by making sure we remain competitive, especially in the cost of producing crude.”

Aviation consultant, Chris Aligbe, said all the government’s parastatals depended on the passengers and the majority of the revenue was from the foreign airlines that have all been shut out because of coronavirus.

Aligbe said the government would have to support both the airlines and regulatory agencies “because they are mutually interdependent.”

“If the airlines do not pick up to the level of pre-COVID-19, then the revenue will not come to the agencies too. More so, we don’t expect normalcy to return (to air travel) until about 18 months. Because in the absence of vaccines, travellers will still be afraid of infection, there will be restrictions in some countries, and then due to economic recession, the lack of funds will prevent people from travelling like before. This will have an impact on airports and the agencies.

“But we should remember that these are all government’s parastatals. By virtue of the laws that established them, unfortunately, none of them can go borrowing. It is the only government that can borrow for them. They all still need their revenue monthly for sustenance and keeping the safety records intact. Then, the government has no choice than to place them on the grant level. They should receive grants to cover their expenditure, while the support is gradually reduced as the revenues start coming from airlines’ operations.

“I worry very much about FAAN. If you leave the carrousel unused for one month, for instance, it will get cranky. So, you need to keep maintaining the airport infrastructure that they may work properly the day operations resume. Unfortunately, apart from Lagos and Abuja airports, all others are running at a deficit,” Aligbe said.

The Secretary-General of the Aviation Safety Round Table Initiative (ASRTI), a think tank group of the local sector, Group Capt. John Ojikutu (rtd), opposed bailout fund proposal for the local airlines, though he is not averse to grants for the agencies.

Ojikutu said that the government only needed to reform the operations of the local carriers to be self-sustaining and remit due contributions to the regulatory agencies.

He noted that the bulk of the earnings, 80 per cent, on commercial aviation were from the foreign airlines, “while the domestic airlines are perpetually indebted to the services providers.”

“Without the foreign airlines, the systems could have collapsed long before now. I believe that no matter how bad the financial status of the government is, these agencies will have cushion funds from the FG.
“However, the government should do to the airlines what was done to the banking sector. Do recapitalisation, not necessarily financial, but fleet recapitalisation. Have a minimum of five aircraft for local operations and not more than four routes daily with good four years of consecutive national civil aviation regulations audits, including the economic audit; three additional aircraft for three regional routes, with further three years additional audits, including the economic audits; three more aircraft for continental routes, with two more years of audits, including the economic audits; three additional aircraft for three intercontinental routes.

“These progressive movements can qualify any domestic airline for flag carrier or national carrier if it pleases the government, but such airline must apply to be quoted in the Nigeria Stock Exchange market,” Ojikutu said.

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