In a bid to review and fine-tune the newly introduced foreign exchange policy, as well as discuss the current liquidity crisis that has astronomically raised interbank rates, lenders’ head of treasury are meeting with the top officials of the Central Bank of Nigeria (CBN) in Lagos on Sunday.
The planned consultation emerged hours after Fitch Ratings downgraded Nigeria’s Long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-‘ and Long-term local currency IDR to ‘BB-‘ from ‘BB’ with stable outlooks.
It was learnt that the meeting, which is at the instance of the treasurers, is basically to review the new forex policy that commenced last Monday and possibly fine-tune some of the grey areas.
The meeting, which is billed for the corporate head office of FMDQ OTC Securities Exchange (FMDQ) – in Victoria Island, Lagos, is the second of such consultations in the last three weeks (last one held on June 1) and treasurers who spoke with this newspaper are upbeat – especially with the Standard Foreign Exchange Forward Market slated to commence on Monday.
Meanwhile, Mobil Oil Producing Company was the toast of the FX market yesterday, as the oil firm sold about $100 million, a development that helped to instill more confidence in the market, even though treasurers insisted that liquidity still remained a challenge.
Also, for the fourth consecutive day since the trading on the new forex policy began, the apex bank yesterday sold dollars to ease shortages, further leading to the strengthening of the naira.
Data obtained from FMDQ website showed that the naira closed at N281.67 to the dollar yesterday as against N282.80 the previous day.
According to Reuters, the naira traded at N283 to the dollar at 1249 GMT, on volumes of $76.8 million, which traders attributed to the CBN’s intervention.
In a bid to prevent a liquidity crisis in the interbank FX market, triggered by the naira debit on banks by the banking watchdog for over $4 billion backlog, the latter had, last Wednesday, opened a discount window for lenders to meet their short-term dollar demands.
This temporary liquidity brought down interbank rates and helped to stabilise activities in the interbank FX market.
Accordingly, overnight tenor of the Nigeria Interbank Offered Rate (NIBOR) fell from 68.50 percent last Wednesday to 25 percent yesterday.
Also, the Open Buy Back (OBB) on which most of yesterday’s transactions were based fell from 63.33 per cent to 20 percent yesterday.
In a statement issued yesterday, the Fitch also said the issue ratings on Nigeria’s senior unsecured foreign-currency bonds have also been downgraded to ‘B+’ from ‘BB-‘. Besides, the rating agency said the Country Ceiling has been revised down to ‘B+’ from ‘BB-‘ and the Short-Term Foreign- Currency IDR affirmed at ‘B’.
Giving reasons for the downgrade, Fitch said: “Nigeria’s fiscal and external vulnerability has worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices.
“Renewed insurgency in the Niger Delta in 1H16 has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency.”
It predicted that Nigeria’s general government fiscal deficit will grow to 4.2 per cent in 2016, after averaging 1.5 per cent in 2011-15, before beginning to narrow in 2017.
According to the agency, despite expected increases in non-oil revenue, the overall general government revenue will drop to just 5.5 per cent of Gross Domestic Product (GDP), from an average of 12 per cent in 2011-15.
It further noted that although the Federal Government has cut fuel subsidies and adopted a number of public financial management reforms that have contained the growth of current expenditure, including the move to a Treasury Single Account (TSA) and the implementation of information systems that have reduced the number of ghost workers.
“Nigeria’s low level of general government debt, forecast to be 14 per cent of GDP in 2016, is well below the ‘B’ median of 53 per cent and a rating strength,” the agency stated.
In addition, the ratings agency stated that the fall in general government revenue represents a risk to the country’s debt profile, estimating that general government debt/revenue will rise to 259 per cent in 2016 from 181 per cent in 2015, higher than the 223 per cent median for ‘B’ rated peers.
“At end-2015, only 19 per cent of central government debt was denominated in foreign currency. Nevertheless, depreciation of the naira will increase the debt and debt service burden.
“A weak policy response to falling external revenues has led to an increase in external vulnerabilities, slower GDP growth and a widening of the current account deficit,” Fitch stated.
Commenting on the new flexible exchange rate policy, the agency insisted that: “The new regime will not be fully flexible, as it will still involve a parallel market as importers of 41 items are excluded from the inter-bank market, which will continue to hinder growth, capital inflows and investment, in Fitch’s view.
Furthermore, the delayed change in exchange rate policy casts some uncertainty over the authorities’ commitment to a more flexible system.” It pointed out that the CBN continued intervention in the FX market will reduce international reserves, which were below $27 billion before the new market began trading compared with $34 billion at end-2014.
The rating agency also noted that although the FG’s move to liberalise fuel prices has allowed more supply to come to market, the move coupled with FX restrictions have led to a rise in inflation to 15.6 per cent in May.
“Inflationary pressures from the depreciation of the naira will be partly balanced by improved foreign currency access, which should reduce supply constraints. Fitch forecasts inflation to end the year at lower than 12 per cent,” it added.
Rating the country’s banks, the agency stated: “Our base case for Nigerian banks is that regulatory total capital ratios will not decline significantly due to the effective devaluation. Any impact will be offset by still strong profitability and high levels of internal capital generation. The new FX regime crucially also provides access to US dollars for the banks to meet demand and their internal and external obligations.”