Nigerian banks’ foreign currency funding gap will rise to $5bn over the current low oil prices, volatile foreign inflows and lower remittances amid coronavirus pandemic, Moody’s Investors Service said on Wednesday.
Moody’s, in its July 2020 report, titled ‘Renewed foreign-currency shortages highlight vulnerability for banks’, said the challenges were threatening to renew the foreign currency liquidity pressures that blighted Nigerian banks during a previous oil crisis in 2016-2017.
A banking analyst at Moody’s, Peter Mushangwe, said, “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.
“Our moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to N1.5tn [$3.8bn], and to N1.9tn [$5.0bn] under our severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenge.”
According to the report, dollar shortages will intensify over the next 12-18 months if low oil prices persist, rekindling the foreign-currency liquidity crisis that led to severe dollar rationing during the last oil price crash in 2015-2017.
It, however, added that different from three years ago, Moody’s rated banks were in better shape as they had bolstered their dollar deposit bases and liquid
“Nevertheless, they remain vulnerable to an acute liquidity crunch if dollar deposits reduce by 20 per cent or more,” the report added.
According to Moody’s, foreign-currency availability will continue to tighten.
It said the lower dollar revenue from exports of oil, volatile foreign investment flows and reduced remittances from Nigerians working abroad would constrain dollar flows into the banking system for the remainder of 2020 and in 2021.
“Already, in the last quarter of 2019, annual foreign-currency deposit growth slowed sharply to eight per cent, from 24 per cent and 35 per cent in the two previous quarters respectively,” it said.
The report said foreign-currency borrowing would be more expensive at a time when banks had to refinance almost half of their borrowings.
It said Nigeria’s credit default swap spread, a proxy for sentiment on Nigerian credit, had increased substantially following the latest oil price slump.
Moody’s added that about 49 per cent of banks’ $7bn foreign-currency borrowings was maturing
in the next 12 to 18 months, creating funding pressure amid slowing dollar deposit flows and likely higher market funding costs.