- Blames Dwindling Oil Revenue, Reduced Diasporan Remittances
Global rating agency, Moody’s has raised a fresh alarm that Nigeria’s banks are facing acute foreign currency shortages.
This, according to a Moody’s Investors Service report released today is occasioned by dwindling oil revenue, volatile foreign investment inflows, and reduced remittances from abroad.
“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%, while loans remain constant, would increase rated banks’ funding gap to NGN1.5 trillion [$3.8 billion], and to NGN1.9 trillion [$5.0 billion] under our severe-case scenario of 35% foreign-currency deposit contraction, creating acute funding challenges” said Peter Mushangwe, Analyst at Moody’s.
Recall that oil and gas exports contribute about 97% of Nigeria’s foreign currency revenue. And with crude oil now trading around $40 a barrel, it has become substantially lower than the average price of $65 in 2019 and $72 in 2018.
As a fallout, Moody’s forecasts a range between $35-$45 over the next 12 to 18 months. Prices within that range, or lower, in the second half of the year would lead to renewed dollar shortages at the banks.
Moody’s-rated Nigerian banks reduced their foreign currency funding gap to a combined NGN354 billion ($984 million) in 2019 from NGN1.436 trillion ($5.5 billion) in 2016. The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106% at the end of 2019 from 135% in 2016 as banks cut back on dollar loans while building up their dollar deposits.
The smaller funding gap will enable the banks to better withstand unforeseen deposit withdrawals and likely higher borrowing costs.
However, in the event of foreign currency deposits contracting by 20% or more, banks’ funding gaps will be significant, the report added.
