Forex liquidity pressure looms as funding gap rises to N1.9trn – Moody’s Ratings



The risk of dollar funding challenges for banks is huge amid declining oil revenue , weak foreign investment inflows and lower remittances, said Moody’s Rating Agency. This is as foreign funding gap may have risen to as much as N1.9 trillion.

“With elevated external shocks, Nigeria’s economy has been hit hard and the banking system would be impacted”, said analysts at Afrinvest.

Though banks are more resilient given current deposit and liquidity levels, the agency indicates that, “there are vulnerabilities, indicating that Nigerian banks could face a resurgence of the foreign currency liquidity pressures witnessed between 2016 and 2017”.

Based on its analysis of the impact of reduced foreign exchange (forex) deposits by 20.0 per cent to 35.0 per cent, banks’ foreign currency funding gap could increase to between N1.5 trillion ($3.8 billion) and N1.9 trillion ($5.0 billion) from N354.0 billion ($984.0 million) at year-end 2019 if loans are unchanged.

However, the agency noted that rated banks considerably cut down on forex loans after the 2016 crisis as foreign currency loans to foreign currency deposits fell to 106.0 per cent at year-end 2019 from 135.0 per cent in 2016, suggesting reduced risks.

The estimation of dollar shortages is based on the expectation of weaker-for-longer oil prices, with Moody’s assuming $35-$45/bbl. over the next 12 to 18 months.

In a similar commentary on banks, Fitch ratings last week noted that weak oil sector fundamentals would restrict Nigerian banks’ capacity to increase credit in 2020. The ratings agency estimated that loan growth would decline to 2.5 per cent year-on-year (y/y) in 2020 from 14.0 per cent in 2019, but with slight improvement to 4.3 per cent in 2021.

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