Wednesday’s decision by policy makers in Africa’s largest economy to adopt a market driven foreign exchange policy holds upsides for lenders, even as it retains its fair share of upheavals.
In a June 15 note to BusinessDay, Renaissance Capital, an investment banking firm, said the new policy would result in revaluation gains as banks use the interbank rate for balance sheet conversions.
“[There will also be] FX trading gains. To better appreciate this however, we need clarity on the modus operandi of the liberalised interbank FX market,” the note penned by Adesoji Solanke, head of research and sub-Saharan bank analyst, Renaissance Capital, stated.
“Will the interbank rate be fixed again, albeit at a higher price, or will it be freely liberalised or within some sort of band? What happens to the backlog of FX demand, particularly those that affect banks’ asset quality?” the report read.
Razia Khan, chief economist at Standard Chartered Bank, also weighed in on the positives of the new FX structure.
“A weaker FX rate will likely boost Nigeria’s receipts from oil revenue, and help contain the overall fiscal deficit,” Khan said in an emailed note to BusinessDay.
However, on the flip side, negatives abound.
“The foreign exchange exposure of the Nigerian banking system, given the preference for USD-lending in previous years, remains a key concern. A much weaker FX rate may initially bring loan deterioration, with higher system NPLs and even in the presence of accommodative monetary policy, appetite for new bank lending may take some time to recover,” Khan added.
Renaissance Capital’s Solanke also highlighted the woes the new policy had in store for lenders in his note.
“Capital and NPL [non-performing loan] risks are the biggest potential negatives of the new FX guidelines,” the report read.
BusinessDay gathered that the lenders were well aware of the NPL and capital risks a weaker naira will bring, yet they wanted to see more flexibility in the interbank rate, which would be supportive of growth and facilitate planning.
In other words, though Nigerian banks view Wednesday’s FX decisions positively; they had anticipated the upheavals to follow.
“For NPLs, the reality is that many small businesses are already either starved of FX or have had to access this at parallel market levels; therefore, some adjustment to a weaker rate has already happened.
The big businesses with significant volume demand were still in queue and operating at the official/fixed interbank rate.
A further move of significant FX demand away from the official rate to a weaker and floating interbank rate should now have a more notable impact on larger corporates; these nevertheless tend to have relatively larger buffers to absorb currency swings,” the report read.
One of the positives of not devaluing for this long is that the banks have had the opportunity to think through the risks of a devaluation compared with 2009, and implement some measures, however small, to deal with this, such as holding customers’ naira at a weaker exchange rate and prioritising liquidation of legacy positions (including card liabilities) as they are able to get FX from the CBN, bank analysts say.
“The challenge is that depending on FX supply dynamics in a liberalised interbank FX system, the interbank rate could run away, at least at the outset. Where it settles is difficult to say but liquidity and confidence in the FX policy will be critical to keeping the markets stable,” they say.
Godwin Emefiele, governor of the CBN announced that the bank would begin the market driven foreign currency trading on Monday, abandoning the 16 month currency peg.
“This will bring confidence to the market. You can now begin to plan for your needs,” said Ini Ebong, Group Treasurer First Bank Holdings Plc, during an interview session at CNBC Africa.
“Fx inflow will spike with the return of foreign portfolio investors. The market has been reopened,” said Ebong.
Nigeria, Africa largest economy, hard hit by a significant drop in oil price by 60 percent, had its stock and bond indexes downgraded by international rating agencies as investors divested on the back of a rigid foreign exchange policy.
Standard & Poor’s (S&P), a global rating agency, revised Nigeria’s sovereign credit outlook to negative, from the stable it was previously. Nigeria currently has a B+ rating by the agency.
Moody’s Investors Service, in April, downgraded Nigeria’s long-term issuer ratings to B1 from Ba3 and has assigned a stable outlook, concluding the review for downgrade initiated on March 4th 2016.
The Central Bank governor said there will be primary and secondary dealers and that the number of dealers will not be more than 8 or 10. He added that the apex bank is working hard to see that there is more supply of foreign exchange in the market.
“If we improve on the level of supply in the market, those demands will be met in the market. If you rush, you may hurt your profit, balance sheet and spike the interest rate,” said Emefiele.
In a June 15 note to BusinessDay, Renaissance Capital, an investment banking firm, said the new policy would result in revaluation gains as banks use the interbank rate for balance sheet conversions.
“[There will also be] FX trading gains. To better appreciate this however, we need clarity on the modus operandi of the liberalised interbank FX market,” the note penned by Adesoji Solanke, head of research and sub-Saharan bank analyst, Renaissance Capital, stated.
“Will the interbank rate be fixed again, albeit at a higher price, or will it be freely liberalised or within some sort of band? What happens to the backlog of FX demand, particularly those that affect banks’ asset quality?” the report read.
Razia Khan, chief economist at Standard Chartered Bank, also weighed in on the positives of the new FX structure.
“A weaker FX rate will likely boost Nigeria’s receipts from oil revenue, and help contain the overall fiscal deficit,” Khan said in an emailed note to BusinessDay.
However, on the flip side, negatives abound.
“The foreign exchange exposure of the Nigerian banking system, given the preference for USD-lending in previous years, remains a key concern. A much weaker FX rate may initially bring loan deterioration, with higher system NPLs and even in the presence of accommodative monetary policy, appetite for new bank lending may take some time to recover,” Khan added.
Renaissance Capital’s Solanke also highlighted the woes the new policy had in store for lenders in his note.
“Capital and NPL [non-performing loan] risks are the biggest potential negatives of the new FX guidelines,” the report read.
BusinessDay gathered that the lenders were well aware of the NPL and capital risks a weaker naira will bring, yet they wanted to see more flexibility in the interbank rate, which would be supportive of growth and facilitate planning.
In other words, though Nigerian banks view Wednesday’s FX decisions positively; they had anticipated the upheavals to follow.
“For NPLs, the reality is that many small businesses are already either starved of FX or have had to access this at parallel market levels; therefore, some adjustment to a weaker rate has already happened.
The big businesses with significant volume demand were still in queue and operating at the official/fixed interbank rate.
A further move of significant FX demand away from the official rate to a weaker and floating interbank rate should now have a more notable impact on larger corporates; these nevertheless tend to have relatively larger buffers to absorb currency swings,” the report read.
One of the positives of not devaluing for this long is that the banks have had the opportunity to think through the risks of a devaluation compared with 2009, and implement some measures, however small, to deal with this, such as holding customers’ naira at a weaker exchange rate and prioritising liquidation of legacy positions (including card liabilities) as they are able to get FX from the CBN, bank analysts say.
“The challenge is that depending on FX supply dynamics in a liberalised interbank FX system, the interbank rate could run away, at least at the outset. Where it settles is difficult to say but liquidity and confidence in the FX policy will be critical to keeping the markets stable,” they say.
Godwin Emefiele, governor of the CBN announced that the bank would begin the market driven foreign currency trading on Monday, abandoning the 16 month currency peg.
“This will bring confidence to the market. You can now begin to plan for your needs,” said Ini Ebong, Group Treasurer First Bank Holdings Plc, during an interview session at CNBC Africa.
“Fx inflow will spike with the return of foreign portfolio investors. The market has been reopened,” said Ebong.
Nigeria, Africa largest economy, hard hit by a significant drop in oil price by 60 percent, had its stock and bond indexes downgraded by international rating agencies as investors divested on the back of a rigid foreign exchange policy.
Standard & Poor’s (S&P), a global rating agency, revised Nigeria’s sovereign credit outlook to negative, from the stable it was previously. Nigeria currently has a B+ rating by the agency.
Moody’s Investors Service, in April, downgraded Nigeria’s long-term issuer ratings to B1 from Ba3 and has assigned a stable outlook, concluding the review for downgrade initiated on March 4th 2016.
The Central Bank governor said there will be primary and secondary dealers and that the number of dealers will not be more than 8 or 10. He added that the apex bank is working hard to see that there is more supply of foreign exchange in the market.
“If we improve on the level of supply in the market, those demands will be met in the market. If you rush, you may hurt your profit, balance sheet and spike the interest rate,” said Emefiele.
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