Nigerian banks to battle FX shortage in 2023 – Fitch

Fitch Ratings, a global credit rating agency, said Tuesday that “things are going to get worse next year” for Nigerian banks amid a protracted foreign exchange liquidity crisis that has unsettled lenders in Africa’s biggest economy.

“Things are going to get worse next year but not materially and the currency shortage is the biggest factor in our outlook,” Mahin Dissanayake, head of African banks at Fitch Ratings said during the agency’s annual Nigeria conference in Lagos.

“The banks will obviously benefit from higher interest rates and government bond yields,” Dissanayake said. But regulatory risks from the Central Bank of Nigeria’s cash reserve ratio policy remains a banana skin, even as the banks now risk a repeat of falling out with international correspondent banks, as in 2016, due to the deepening foreign exchange shortages.

Nigerian banks saw their trade lines with foreign correspondent banks cut off in 2016 due to a growing backlog caused by dollar shortages.

Read also: Fitch joins Moody’s in downgrading Nigeria on ‘high debt service’

“The first sign is a lot of overdue trade finance obligations to international correspondent banks being built up,” Dissanayake said.

“We have seen signs of that but not to the extent we saw in 2016, but it could change. You just need an international correspondent bank to call in a default,” he said.

Banks rationing dollars combined with the persistent decline in external reserves add to the apprehension that the dark days of 2016 may be a short crawl away for the banks.

The credit ratings of the banks are also likely to be affected, with the sovereign ratings worsening.

Fitch downgraded Nigeria to B- with a stable outlook last Friday, barely weeks after Moody’s Investor Service took an even harsher stance by downgrading the Nigerian government’s rating to B- with a negative outlook.

Both agencies cited weak government earnings despite high oil prices and rising debt service costs as the main drivers of the downgrade.

The implication of a credit downgrade is that the government will pay more to tap the international market which implies that banks and every other corporate would also see their cost of foreign borrowing rise, given that the government’s borrowing cost is the benchmark for corporates.

Bankers at the Fitch conference however pointed out some reasons to be optimistic about 2023.

“Despite the FX liquidity challenges, there are opportunities to finance export-driven businesses,” said Wole Adeniyi, chief executive officer of Stanbic IBTC Bank.

“There’s also the Africa Continental Free Trade Area that unlocks a $3 trillion market, and we see some opportunities there as well as in consumer lending, which is on the rise,” Adeniyi said.

A possible pick-up in Nigeria’s oil production next year after the lows of 2022 is also driving some optimism, according to Gregory Ovie Jobome, chief risk officer at Access Bank Plc.

“The actions being taken to stem theft and pipeline vandalism are yielding fruit, and if it picks up and production rises and oil prices stay positive that should feed into external reserves and help stabilise the naira,” Jobome said.

“That would be positive for the entire economy and the banking sector but, of course, we can’t write off the challenges with inflation and unemployment which is unlikely to go away anytime soon,” he said.

Nigeria’s beleaguered economy could do with a boost to oil revenues, which have been low this year despite high oil prices due to low production.

Nigeria managed to exceed the 1-million-barrels daily oil production mark in October, the first time it crossed the mark in three months.

The production level however remains well below the OPEC allocation of 1.826 million barrels daily for October.

Nigeria reportedly lost as much as $800 million in earnings that could have accrued to the federation to facilities’ shut-ins and equipment failures in August and even more in September.

The country is also dealing with an unprecedented oil theft that has hobbled the country’s ability to meet its OPEC quota in the last one year.