No cause for alarm over Moody’s report on Nigerian banks-Expert

The recent report over foreign currency liquidity by global rating agency Moody’s has been flayed by renowned financial expert and economist, Prof. Uche Uwaleke.

According to Uwaleke, banks have over the past three years been able to reduce the foreign loans and foreign currency deposits.Just recently, Moody’s issued fresh warnings in a new report that Nigerian banks are facing foreign currency liquidity pressures of the type seen during a 2016-2017 crisis.

It said the forex liquidity pressures stem from current low oil prices, volatile foreign inflows and lower remittances in the face of the coronavirus pandemic, creating a similar situation as blighted them in the previous oil crisis of four years ago.

“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, a banking analyst, at Moody’s.

The report noted that Moody’s moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to N1.5 trillion [$3.8 billion], and to N1.9 trillion ($5.0 billion) under our a severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenges.

Painting the scenario of Nigeria’s economy make-up, the report noted that oil and gas exports contribute about 90 per cent of Nigeria’s foreign currency revenue, whereas crude oil now trades around $40 a barrel, substantially lower than the average price of $65 in 2019 and $72 in 2018.

However, Uwaleke stated that “The cheering news is that between 2016 and 2019, Nigerian Banks, under the supervision of the CBN, were able to reduce their foreign currency funding gaps as well as the ratio of foreign currency loans to foreign currency deposits.

“This has helped in no small measure in bringing about the relative stability in the banking industry post 2016 economic recession.

“I expect that the issue of forex liquidity squeeze is certainly one that is bugging the CBN. It is for this reason the apex Bank requested oil companies to channel forex through it rather than NNPC,” he stated.

He noted that the reality on ground is that a reversal will only happen following a significant increase in crude oil price, while stating that the CBN could still increase it’s current level of forex funding.

“Where this does not materialize in the near term, the CBN can still afford to increase its current levels of forex market funding on the strength of external reserves position well in excess of 3 months of merchandise imports and the IMF loan that recently crystallized since the government has shown no sign of not meeting the conditions.

“Be that as it may, the long term solution remains diversifying forex sources beyond oil via Agriculture, Solid minerals and Tourism as well as creating an environment that lures foreign investors,” he added.