Britons are fantastically selfish and lethargically xenophobic. They loath uninhibited flows of emigrants from poorer European countries like Romania, Hungary, Poland, Serbia and Croatia into Britain. European Union laws encourage member states to be their brothers’ keepers, but British voters are averse to that. Last week they trooped out to the polls in a historic referendum and voted to terminate Briton’s membership of the Union primarily to halt the flow of emigrants into the island.
The decision sent shock waves down global stock markets. Global stock prices tumbled by a staggering $2 trillion as investors react to perceptions of economic and political consequences of what was derisively tagged Brexit.
The vote for isolation brutally halted the jolly ride of the capitalization of the Nigerian Stock Exchange (NSE) to N11 trillion. The capitalization of the NSE depreciated on Friday by about N160 billion. Despite the sharp reaction to the cruel isolation vote in Britain, the market closed last week at N10.5 trillion as against N10.004 trillion recorded the previous week.
Investors in the Nigerian capital market are probably the first beneficiaries of the flexible exchange rate policy of the Central Bank of Nigeria (CBN). Share prices in the market have been surging as foreign portfolio investors who fled the country because of the irksome margin between parallel market and the artificially pegged rates at the official window of the CBN, scramble to take positions in the market.
Share prices in the NSE had been unacceptably low as a result of the bearish posture of the market engendered by the flight of foreign portfolio investors. However, within two weeks of the announcement of plans by the CBN to allow market forces determine the exchange rate of the naira, the share prices of some stocks have appreciated by 30 per cent.
Investors in the NSE are hailing the huge capital gains conjured by flexible exchange rate.
The situation is a sharp contrast from the oil industry where debtor firms are wailing over the consequences of the policy. Nigerian banks were very liberal in the creation of risk assets in the oil and gas industry during the boom years between 2009 and 2014.
Risk managers apparently threw caution to the winds and advanced dollar-denominated loans to all manner of firms in the industry. Most of the risk managers who were still in the industry when a six-month drop in oil prices almost triggered systemic failure in Nigeria’s banking industry, ignored lessons from the 2009 development and excessively exposed their banks to the industry when oil boom returned.
Statistics from banking regulators suggest that loans to the industry hovers around $10 billion. The dollar-denominated loans are now plaguing both the banks and debtor firms in the oil and gas industry.
Most of the loans were advanced to the oil firms at the official exchange rate of N160 to the dollar. The naira value of the loans at the time they were consummated was just N1.6 trillion.
Last week flexible exchange rate pushed the official exchange rate of the naira to N281 to the dollar. That development automatically escalated the debt profile of the oil firms to N2.8 trillion. That precisely is why the indebted firms are wailing over flexible exchange rate at a time when investors in the NSE are hailing the same policy. Oil firms that raised $100 million loans would now have to pay back N28.1 billion rather than the N16 billion agreed upon when the loans were consummated. The phenomenon is a milder replay of the scenario in the two industries in 2009, except that this time a heavier devaluation of the naira is causing less ripples in the banking industry than when the naira went down by a scant N36 in 2009. In 2009 the naira depreciated from N116 to N150 to the dollar. At least three banks collapsed from the effect of the N36 depreciation as many oil firms with dollar-denominated loans defaulted in their repayment obligations.
Two weeks ago the naira was devalued by a whooping N84 from N197 to N281 per dollar, but no bank is showing any sign of terminal illness as a result of the massive default in dollar-denominated loans by oil and gas firms. Even as statistics from the CBN suggest that the ratio of non-performing loans in the banking industry has crossed the prudential guidelines threshold of five per cent to a worrisome 10 per cent, the operators and regulators of the industry are not panicking like they did in 2009.
The truth is that the regulators sounded the alarm even before oil prices started heading south. Some banks might have been defiant in reining in their risk managers, but the situation is not as bad as 2009.
In 2009, CBN inherited non-performing loans amounting to N5 trillion mostly from over-exposure to the oil and gas industry. Now the banks can provide for their bad loans. The apex bank does not have to purchase any.
Even the surge in inflation rate might not be as perilous as earlier projected. Manufacturers, now sourcing forex for raw materials at the flexible exchange rate, had already priced their products on the basis of parallel market rates.
