Moody’s forecasts $5bn forex shortfall in Nigerian banks

Moody’s Investors Service has projected a huge shortfall in Nigerian banks’ foreign currency funding of about $5 billion as the country faces growing funding challenges occasioned by the current low oil prices, volatile foreign inflows and lower remittances amid coronavirus pandemic.

The leading global ratings and research firm in its July 2020 report, titled ‘Renewed foreign-currency shortages highlight vulnerability for banks’, stated that the foreign currency liquidity pressures for the banks were threatening just as they experienced during a previous oil crisis in 2016-2017.

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A banking analyst at Moody’s, Peter Mushangwe, commented: “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”, he added.

Moody’s report findings indicated that dollar shortages would intensify over the next 12-18 months if low oil prices persist, thereby re-enacting foreign-currency liquidity crisis situation of last oil price crash in 2015-2017 which led to severe dollar rationing for the Nigerian banks.

The rating firm, however, posited that quite different from the 2015-2017 crisis, the banks were in better position now given their current dollar deposit bases and liquid assets.

Even then, it cautioned: “Nevertheless, they remain vulnerable to an acute liquidity crunch if dollar deposits reduce by 20 per cent or more.”

According to Moody’s, foreign-currency availability will continue to tighten as lower dollar revenue from oil exports, volatile foreign investment flows and reduced remittances from Nigerians working abroad would constrain dollar flows into the banking system in the next 18 months.