Forex Scarcity Renders Nigerian Banks Vulnerable
Nigeria’s banks to experience acute funding challenges as the drop in foreign currency deposits hit a record-low following COVID-19 pandemic disruption, stated Moody’s.
In a recent report titled ‘Renewed foreign-currency shortages highlight vulnerability for Nigerian banks‘ published by Moody’s Investors Service, a bond credit rating business of Moody’s Corporation, the drop in dollar deposits amid low oil revenue, volatile foreign investment and declined remittances from abroad due to COVID-19 pandemic are threatening to renew forex liquidity crisis of 2016-2017 on Nigerian banks.
“Lower dollar inflows at a time when foreign currency borrowing will likely be more expensive for Nigerian banks will strain their foreign currency funding, despite substantial improvements compared to 2016,” said Peter Mushangwe, Analyst at Moody’s.
“Our moderate scenario where foreign-currency deposits decline by 20%, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges.”
According to Moody’s, oil and gas exports account for about 90 percent of Nigeria’s foreign currency revenue. However, with crude oil now trading at around $40 per barrel, far below its average of $65 per barrel in 2019 and $72 per barrel in 2018, Nigeria’s banks are expected to struggle to meet foreign-currency withdrawals in the next 12 to 18 months.
Moody’s said its rated “banks reduced their foreign currency funding gap to a combined NGN354 billion ($984 million) in 2019 from NGN1.436 trillion ($5.5 billion) in 2016. The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106% at the end of 2019 from 135% in 2016 as banks cut back on dollar loans while building up their dollar deposits.
“The smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs. However, in the event of foreign currency deposits contracting by 20% or more, banks’ funding gaps will be significant.”
This further explained why the Nigerian Naira is trading at a record low of N461 against the United States dollar on the black market in recent weeks.
Naira Declines Slightly on the Black Market to N474/$
Naira Drops Marginally on the Black Market to N474 Against US Dollar
Nigerian Naira declined marginally on Tuesday on the parallel market, popularly known as the black market.
The local currency declined by N1 to N474 per US dollar, down from the N473 it traded on Monday.
This was coming after Shoprite announced it would be exiting Nigeria, Africa’s largest economy. The announcement further damped the nation’s economic outlook amid the already heighten economic uncertainties.
Nigeria continues to struggle with low dollar availability after low oil prices and weak global demand for the commodity eroded the nation’s foreign revenue generation.
On the Investors and Exporters Forex window, the Naira remained pressured at N389 to a US dollar, better than the N389.25 it exchanged on Monday but more than the N381 stipulated by the Central Bank of Nigeria.
Total turnover traded by investors rose from $18.83 million traded on Monday to $24.66 million on Tuesday.
Experts have said the series of bad news emanating from the country will continue to deter potential investors and hurt capital importation necessary to boost dollar liquidity.
Forex Scarcity Weighs on Manufacturing Sector
Manufacturing Sector Suffers from Lack of Dollar Liquidity
The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, has said lack of dollar availability continues to weigh on the manufacturing sector in the first half of the year as the sector recorded its third consecutive month of contraction in the month of July.
According to Yusuf, several manufacturers had to source for forex on the black market, increasing scarcity on the already stressed section of the forex even more. This, other experts have blamed for the high Dollar-Naira exchange rate on the black market.
On Monday, the Naira was exchanged at N473 to a US dollar on the parallel market popularly known as the black market. The local currency gained N2 from the N475 it was exchanged before the Sallah holiday to N473 on Monday when the market opened.
“Across, practically, all sectors, we are experiencing cost escalation, loss of credit lines enjoyed from foreign creditors, forex remittance challenges and many more. We need an urgent response from the CBN to calm the situation and restore confidence in our foreign exchange management framework,” Yusuf stated.
The Lagos Chamber of Commerce and Industry said most of its 2,000 members have been hit by the dollar shortage and wide foreign exchange rate that is presently eroding their profits.
“If the situation persists, it will lead to lay-offs. If you are not producing, there will be a shortage of goods in the market, prices will go up,” he added
Naira Gains N2 Against US Dollar to N473 on Black Market
Naira Gains Against Dollar to N473 on Black Market
The Naira gained slightly on the parallel market, popularly known as the black market, on Monday to exchange at N473 per US dollar.
The local currency traded at N475 to a US dollar on Friday before gaining N2 to N473 on Monday.
This is coming on the back of dollar scarcity caused by falling foreign reserves and low oil prices.
Against the British Pound the local currency declined by N5 from N585 it traded on Friday to N590 on Monday.
This continues against the Euro single currency as the Naira depreciated by N2 to N542, down from N540 it traded on Friday.
On the Importers & Exporters Forex window, the Nigerian Naira exchanged at N389.25 against the United States dollar, slightly below the N388.33 it opened on Monday.
Investors traded $18.83 million during the trading hours of Monday on the I&E FX window.
The Central Bank of Nigeria’s exchange rate remains N381 to a United States dollar.
The apex bank had adjusted the local currency foreign exchange rate twice in the last few months to ease the pressure on the nation’s dwindling foreign reserves.
Still, the inability of the apex bank to improve the supply of the US dollar into the economy continues to weigh on the Naira value and general economic activities.
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