Banks dollar liquidity improve on the back of new CBN window says Fitch

 

 

The ability of Nigerian banks to access foreign currency has improved considerably since the Central Bank (CBN) introduced a foreign exchange window aimed at investors and exporters, global credit rating agency, Fitch said Tuesday, June 7.

The introduction of the Investors’ and Exporters’ window, otherwise regarded as NAFEX, on April 24 is the CBN’s latest attempt to beat an acute dollar crunch brought on by plunging oil revenues and a dry up in foreign capital inflows and diaspora remittances. Investors had fled the country on the back of the crunch which saw their funds trapped for some time.

“In our opinion, NAFEX offers a more transparent alternative to accessing foreign currency than is available through the other foreign-exchange markets in the country,” the New York-based ratings agency said.

Although it added that, “While the improved foreign currency access is credit positive for banks, the ratings of all the Nigerian banks remain constrained by our sovereign rating of ‘B+’/Negative.”

Fitch first revised the outlook on its B+ Nigeria sovereign rating for foreign and local currency and long-term obligations from stable to negative in January, acting in response to the fx illiquidity, and its impact on growth, public finances and the banking sector.

The aftermath of a plunge in oil revenues, which account for 90 percent of foreign currency inflows, slashed government revenue and tipped import-dependent Nigeria into its first economic recession in 25 years.

The liquidity crunch was exacerbated by a raft of capital controls by the CBN, and it restricted imports and forced several Nigerian banks to extend maturities on their trade finance obligations.

The new window- NAFEX- provides investors and exporters with a more transparent mechanism through which they can sell foreign exchange to willing buyers.

Authorised banks act as intermediaries, clearing funds supplied by portfolio investors and exporters, while ensuring timely execution of settlement for buyers.

The CBN can intervene on NAFEX, “but we understand from our recent discussions with banks that CBN interventions have been limited,” Fitch observed.

NAFEX rates have averaged about NGN380 to the US dollar recently and volumes are reaching about USD1 billion a week, according to Godwin Emefiele, the CBN governor, who promised to allow demand and supply to determine the rates on the window.

The new window has inspired investor confidence, spurring a stock market rally driven by gains from banking shares.

The All Share Index (ASI) was up 1.5 percent to a near two-year high of 32,686 points, according to NSE data compiled by BusinessDay.

The banking index however cooled from a 7-day rally to close at 381 points on Wednesday, driven by profit taking activities.

There are several exchange rates in Nigeria, from the CBN quoted N305 per dollar to the black market’s N368 per dollar and a N365/$ rate for retail users.

NAFEX introduces yet another exchange rate, which adds to the confusion, but its rates are set by market participants and this is already attracting greater volumes than other exchange mechanisms.

The ability of market participants to set their own rates under NAFEX is also forcing down exchange rates on the parallel markets.

The black market rate was quoted at N368 per dollar on Wednesday, according to data from abokifx, which collates daily prices from traders, firming from around N500 prior the introduction of the NAFEX rate.   The naira was quoted at 377.83 to the dollar at the investor window, according to trading platform, FMDQ OTC Securities Exchange.

“This is positive for the banks as it helps to draw funds back into the banking sector,” Fitch said. “Over time, exchange rates may converge, but this will depend on a range of market and political considerations.”

The CBN was the main supplier of dollars during the height of the foreign currency liquidity crisis and it still supplies the market through regular auctions, with banks acting as intermediaries.

The central bank has been selling dollars since February in an effort to improve liquidity and narrow the spread between the official and black market exchange rates for the naira. Close to $5 billion has been sold, according to traders.

 

LOLADE AKINMURELE