Nigerian banks face $3.8bn-$5bn fx funding gap as liquidity pressure mounts

RATING AGENCY, MOODY’S, has 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 foreigncurrency deposits decline by 20%, 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 severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges.

Moody’s said it’s rated Nigerian banks have bolstered their dollar deposit bases and liquid assets since 2016, but that scenario analysis still highlights vulnerabilities.

Painting the scenario of Nigeria’s economy make-up, the report noted that oil and gas exports contribute about 90 percent 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.

Moody’s said it forecasts a range of between $35-$45 over the next 12 to 18 months, stressing that even prices within that range, or lower, in the second half of the year would lead to renewed dollar shortages at the banks.

According to the report, Moody’s-rated Nigerian banks reduced their foreign currency funding gap to a combined N354 billion ($984 million) in 2019 from N1.436 trillion ($5.5 billion) in 2016, adding that, “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”.

It noted that the smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs, adding “However, in the event of foreign currency deposits contracting by 20% or more, banks’ funding gaps will be significant”.