The sell-off in Nigerian stocks intensified yesterday with equities approaching a bear market, as markets woke up to news that Saudi Arabia cut the cost of its crude to the U.S., sending oil prices to a three-year low.
The NSE – ASI tumbled 1.61 percent to 36,744.46 points, bringing it 14.62 percent lower than the 2014 highs of 43,039.45 points reached on July 9.
A bear market is usually defined as a 20 percent decline from a previous high.
Nigerian stocks are selling off as the twin spectre of a hit to oil companies and bank earnings and potential devaluation of the naira or depletion of reserves weigh on investor sentiment.
“There is a possible risk from oil price decline to the non-performing loans (NPL) and provisioning of banks,” said Kayode Omosebi, a financial services analyst with UBA Capital, in a response to questions.
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“Loans to the oil and gas sector currently stand at N2.45 trillion with a growth rate of 24.4 percent – the highest growth in loans by sector; so yes there is a need for worry. Taking a cue from the recent report by Goldman Sachs, which states that oil prices will fall to US$70/b in 2015 which is the price banks set for oil price, we will definitely see a slight increase in bank’s provisioning going into FY:2014 and 2015.”
WTI oil fell as much as 3.7 percent yesterday to the lowest price since October 2011. Brent for December settlement declined as much as 3.2 percent to $82.08 a barrel on the London-based ICE Futures Europe exchange.
State-owned producer, Saudi Arabian Oil Co., or Saudi Aramco, lowered the premium for Arab Light relative to U.S. Gulf Coast to the least since December.
Bank stocks have been particularly hit hard as the Nigerian Stock Exchange (NSE) Banking Index, which tracks the nation’s 10 biggest banks by market value, has lost – 16.51 percent year to date, compared with a -9.64 percent fall in the NSE All-Share Index.
Analysts say the fall in oil which makes up 70 percent of the Federal Government’s budget and 95 percent of dollar earnings is testing the CBNs FX stability mandate.
The CBN increased its Retail Dutch Auction System (RDAS) FX sales to $ 3.1bn in October, the highest since March 2014, from $2.5bn in August.
Gross FX reserves fell 14 percent to $38.76 billion from $45.08billion in the year to November 3, 2014 according to CBN data.
The naira weakened to a low of N166.15 to the dollar yesterday as at 4.00 P.M. local time, according to FMDQ data.
“Despite the weak oil price, the Central Bank of Nigeria will probably support the NGN for now, but at the expense of FX reserves. An upward re-pricing of short-dated yields looks highly likely, hence our recommendation to reduce exposure to duration,” Standard Chartered analysts led by Samir Gadio, Head of the banks Africa Strategy and FICC Research, said in an October 31 note.
The primary market yield on the 364-day T-bill edged higher in recent auctions, to 12.6 percent on 22 October, from the mid-11 percent area in September.
“The sustained fall in oil prices in recent times continues to arouse anxiety over Nigeria’s political, financial and economic space, as government and other key stakeholders evaluate the possible impact of low prices on the nation’s economic and financial stability,” said analysts from investment firm, Meristem Securities in a November 03 note.
PATRICK ATUANYA
