The pressure on Nigerian banks’ liquidity has increased as a result of the Central Bank, the main provider of foreign exchange in the nation, reducing its exchange supply to local businesses.The result has been a “substantial” difference between the official and unofficial exchange rates in the nation, according to a report by the worldwide rating agency Moody’s.
Local businesses may be at risk from FX shortages that endanger bank liquidity. In its summary of the report, published on Thursday, Moody’s stated that banks providing trade finance for import-oriented business clients often have to make up any gap should the firms default on their Currency liabilities.
According to Moody’s, the foreign-currency rationing involves limited, partial, or delayed foreign currency allocation to import-oriented businesses, increasingthe risk that these firms fail to meet their import-related payments.These commitments are typically covered by trade-related instruments (e.g. letters of credit) issued by the banks. It further notes that should the company be unable to make the payment, the instruments normally would require the banks to cover from their own foreign currency reserves the full or remaining amount of the purchase.“This would potentially put their FX liquidity under pressure.
Foreign-currency shortages faced by importers also limit the volume of cross-border transactions that these companies can conduct with banks, something that will weigh on bank revenue,” it said.
Moody’s said to mitigate that risk, Nigerian banks have over the last 12 months been reducing the size of their trade exposures, collecting more cash collateral from trade-finance clients, or ensuring in advance that clients can source FX.
The Agency estimates that the off-balance sheet trade-related exposure of the banks its rates in Nigeria amounted to around $9.8 billion in June last year, representing over 54% of their FX liquid assets.The nine Nigerian banks rated by the Agency are Access Bank Plc, Zenith Bank Plc, First Bank of Nigeria Limited, United Bank for Africa Plc, Guaranty Trust Bank Limited, Union Bank of Nigeria plc, Fidelity Bank plc, First City Monument Bank, and Sterling Bank Plc.
These large amounts of FX lent to the central bank pose a further risk, Moody’s said.It estimates that these nine banks had lent an aggregate $10.4 billion in FX to the central bank as of June last year. While it acknowledged that the central bank has a strong track record of repaying the FX it owes to the banks, it noted however that at a time of acute FX shortages, there is an increased risk that it would extend the life of some contracts, postponing repayment.
To mitigate that risk, Nigerian banks are gradually reducing the duration and the size of those contracts, its aid.According to Moody’s, as of June 2022, 36% of the nine banks’ outstanding credit letters were expected to expire in the next three months, and 93% were expected to expire in the next year.According to Moody’s, Nigeria’s limited local oil production, higher import costs for refined petroleum products, and capital outflows are to blame for the country’s current exchange rate crisis. It observes that despite a slight increase in the final quarter of 2022, Nigeria’s crude oil production considerably decreased in 2022, and the production outlook for 2023 is questionable.
