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Moody’s: Nigerian Banks’ Liquidity threatened by Forex shortage

The liquidity position of Nigerian banks has come under pressure as the Central Bank, the major supplier of foreign currency in the country, has scaled…

The liquidity position of Nigerian banks has come under pressure as the Central Bank, the major supplier of foreign currency in the country, has scaled down its supply of exchange to local companies.

This has led to a “material” gap between official and unofficial exchange rates in the country, Moody’s, an international rating agency, said in a report.

“FX shortages faced by local companies may threaten bank liquidity. Banks providing trade finance for import-oriented corporate clients must typically cover any shortfall should the firms default on their FX liabilities,” Moody’s said in its summary of the report released Thursday.

Moody’s said the foreign-currency rationing entails reduced, partial or delayed allocation of foreign currency to import-oriented companies, increasing the 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.

For the nine banks, Moody’s estimates that as of June 2022, 36% of outstanding credit letters were expiring within the following three months, and 93% of outstanding credit letters were expiring within the following twelve months.

Moody’s blames the FX crisis in Nigerian on the country’s constrained domestic oil production, higher prices for imports of refined petroleum products, and capital outflows. It notes that Nigeria’scrude oil production materially declined in 2022 while the production outlook for2023 remains uncertain despite a mild uptick in the last quarter of 2022.

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