Nigeria’s banks are facing foreign currency shortages because of low oil prices, volatile foreign inflows and lower remittances amid the pandemic, threatening to renew foreign currency liquidity pressures that blighted them during a previous oil crisis in 2016-2017, Moody’s Investors Service said in a report on Wednesday.
“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,” said Peter Mushangwe, an analyst at Moody’s.
“Our moderate scenario where foreign-currency deposits decline by 20 per cent, while loans remain constant, would increase rated banks’ funding gap to N1.5 tn [$3.8bn], and to N1.9tn [$5bn] under our severe-case scenario of 35 per cent foreign-currency deposit contraction, creating acute funding challenges.”
Oil and gas exports contribute about 90 per cent of Nigeria’s foreign currency revenue. Crude oil now trades around $40 a barrel, substantially lower than the average price of $65 in 2019 and $72 in 2018.
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 N354bn ($984m) in 2019 from N1.436tn ($5.5bn) in 2016.
The ratio of foreign-currency loans to foreign-currency deposits at Moody’s rated banks dropped to 106 per cent at the end of 2019 from 135 per cent 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 per cent or more, banks’ funding gaps will be significant.