Oil shock from Iran conflict may shake African banks  – Fitch

African banking systems could come under fresh pressure if a prolonged Iran conflict drives oil prices sharply higher, with implications for inflation, currencies, and sovereign creditworthiness across the continent, according to Fitch Ratings.

In a new report by the global rating agency, Fitch warns that while its baseline outlook, built on a short-lived conflict and average oil prices of $70 per barrel in 2026, poses little immediate threat to bank ratings, a more severe scenario could quickly change that narrative.

Under an adverse case where the Strait of Hormuz remains effectively closed until mid-2026 and oil prices average $100 per barrel, the ripple effects across African economies and financial systems would be significant, particularly for oil-importing countries.

Fitch notes that sustained high oil prices would reignite inflationary pressures across major African economies such as South Africa, Kenya, Morocco, and Tunisia. The shock would also reverberate across the West African Economic and Monetary Union (WAEMU), with risks of fuel shortages in some markets.

Central banks, in response, may be forced to tighten monetary policy beyond current expectations, raising borrowing costs, slowing economic growth, and weakening loan repayment capacity.

“Higher import bills and worsening terms of trade could weaken currencies and dampen foreign investor appetite, compounding external vulnerabilities. Although some regions, such as WAEMU and Central Africa, benefit from managed exchange rate regimes, broader macroeconomic pressures would still filter into banking systems,” it said.

Pierre-Olivier Gourinchas, IMF chief economist, speaking at the IMF/World Bank Spring Meetings, said foreign exchange volatility is set to increase as central banks allow currencies to adjust to a fresh global shock driven by rising energy prices and geopolitical tensions.

He added that policymakers are facing a classic negative supply shock that is already tightening financial conditions globally.

The shock, triggered by escalating tensions in the Middle East has pushed up oil and gas prices, alongside diesel, jet fuel, fertilizer, aluminum, and helium, raising production costs and weakening purchasing power across economies.

Gourinchas noted that one of the key transmission channels is through financial markets, where higher risk premiums, falling asset prices, and a stronger US dollar are already creating pressure on currencies, particularly in emerging and developing economies.

“Financial conditions could tighten through lower asset valuations, higher risk premiums, capital outflows, and dollar appreciation, all of which would dampen demand,” he said.

In response, the IMF signaled that central banks should not rush to defend their currencies, but instead allow exchange rates to act as shock absorbers.

Banking sector resilience to be tested
The knock-on effect for banks would likely include rising non-performing loans and higher impairment charges as households and businesses struggle under tighter financial conditions.

However, Fitch highlights a key buffer: African banks generally maintain strong pre-impairment operating profits and capital buffers above regulatory minimums. This provides a cushion against moderate shocks, including currency depreciation and asset quality deterioration.

Still, foreign-currency liquidity could come under strain in more vulnerable economies, especially those reliant on external financing. That said, Fitch believes most banks retain adequate foreign-currency liquidity and have limited exposure to external debt, reducing direct contagion risks from global investor sentiment shifts.

In contrast, oil-exporting economies such as Nigeria and Angola could see some upside from elevated crude prices. Improved foreign-currency inflows would strengthen liquidity in their banking sectors and enhance the credit quality of loans to oil and gas firms.

But Fitch cautions that the gains may be uneven. In Nigeria, for instance, reliance on foreign portfolio inflows could limit the full benefits of higher oil prices if global risk sentiment deteriorates under a prolonged conflict.

“Ghana, meanwhile, is expected to see limited direct gains due to its near-neutral oil trade position, although stronger gold export earnings and improved reserves provide a buffer against external shocks,” the rating body disclosed.

The most critical transmission channel, Fitch emphasises, is the tight link between African banks and their sovereigns. Banks across the continent hold large volumes of domestic government securities, making their balance sheets highly sensitive to sovereign stress.

A deterioration in fiscal positions driven by higher debt servicing costs and reduced access to international markets could push governments to rely more heavily on domestic financing.

This, in turn, would deepen the sovereign-bank nexus and heighten systemic risk. Fitch warns that sovereign ratings themselves could come under pressure in the adverse scenario, although outcomes would vary depending on policy responses, fiscal adjustments, and the durability of oil price shocks.

For now, the ratings agency maintains that African banks remain broadly stable under its base-case assumptions. But the margin for comfort is thin.