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$28.9b reserves: CBN warns against reckless forex spending

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Written by Maritime First
  • As Banks’ bad loans hit N856.9b – Report

With Nigeria’s foreign reserve standing at $28.9 billion, the Central Bank of Nigeria (CBN) has warned against reckless depletion of the kitty.

Addressing reporters at the end of the bi-monthly Monetary Policy Committee (MPC) meeting in Abuja yesterday, CBN Governor, Godwin Emefiele said the reserves today stands at $28.9 billion. “The fact that we have began to see some accretion to the reserve does not mean we should be reckless,” he warned.

He said the CBN “will continue with the policy of ensuring that forex is made available to those who are importing raw materials and supporting the agricultural sector but not to those who want to engage in less important sectors of the economy.”

“It is exciting to see this (rise in foreign resreves) happen. We do not run a floating regime, we run a managed float. What that means is that from time to time we will continue to intervene in the market to ensure that the exchange rate does not go beyond our expectations and those interventions would be to moderate the risk as we deem necessary,” he said.

Reacting to accusations that the apex bank is keeping multiple exchange rates, the CBN governor appealed to “those who are out there fomenting this bad stories in order to portray the monetary authorities in bad light to please assist us, if they have questions they should please approach us, we would respond to them as appropriate.”

Emefiele said the allegations of multiple rates is unfortunate and unfair from those with direct access to information in the CBN. “What I had expected is that they would talk to us, I know they know but of course the objectives they’re pursuing is best known to them,” he said.

He explained the “budget rates are forecast rates which has always been there from history; it is a rate used to determine the budget, we seized the opportunity when the issue of pilgrimage came up last year to explain what happened and you must put yourself in the position of a businessman where you have struck a deal but because the conditions have changed you now pull back and begin to change the conditions. That is an unfair business practice. What happened was that sometime last year the pilgrims commissions (both Christian and Muslim) approached the CBN when the rate was N197/$ and those who were going on pilgrimages started to make payments at N197/$.”

He added that “they made their full payments in advance of the pilgrimages so when they now wanted to embark on their pilgrimages in July and August, somebody says because market has moved they should pay N300+/$. That would have, on the part of the CBN, been seen to be an unfair business practice just like if the rate had gone down. All other rates operate within the interbank segment and operate within the range.”

On the recent call by Vice President Yomi Osibajo for both monetary and fiscal authorities to meet on the fate of the naira, the CBN governor stated that “we have been operating flexible exchange rate policy since June 2016 and that document is sound. There may be a few fine tuning in terms of the implementation strategies; we would look at it from time to time but there is nothing wrong with that document and there is nothing wrong with what the CBN is doing at this time to stabilise exchange rate but we will see to it that the currency stabilises at a rate that we consider to be in line with any model that anybody wants to use to determine the price and value of our currency. There is no need for anybody to panic.”

In the meantime, banks’ assets have depreciated in the last two years, with provisions for Non Performing Loans (NPLs) hitting N856.9 billion, a financial market report has said.

The report by the investment and research firm Afrinvest West Africa Plc was released yesterday. It said provisioning for the NPLs, which rose 3.1 times from N280.4 billion in December 2014 to N856.9 billion last August, trimmed qualifying capital for mid to small-sized banks. The high concentration of forex denominated loans has nominally increased risk weighted assets following pressure on forex rate, it said.

The report titled: “The Nigerian Economy and Financial Market 2016 Review and 2017 Outlook: Reform or be Relegated”, attributed the rise in NPL to foreign exchange (forex) crisis, low oil prices, which fell below trend production volumes and tight monetary policy, which plunged the economy into recession while the asset quality of banks has sharply deteriorated.
These, the report said, were at the heart of a slow-burning solvency and liquidity crisis in the financial sector.

It said the NPL ratio increased from 2.9 per cent in 2014 to 11.7 per cent as of June 2016, with the forecast it could rise to 12.1 per cent as at December 2016. The pressured portfolios of the banks include upstream oil and gas, general commerce, manufacturing and power sectors, which account for 48.1 per cent of total industry loan book.

The report also said FBN Holdings, Diamond Bank Plc, Heritage Bank Limited, First City Monument Bank Limited, Union Bank of Nigeria Plc, Unity Bank of Nigeria Plc and Skye Bank Plc would either require fresh capital or aggressively capitalise their earnings to stay within prudential limits in the next one year.

The Capital Adequacy Ratio (CAR) for banks that operate in Nigeria alone is 10 per cent, and is 15 per cent for lenders with offshore subsidiaries and 16 per cent for Systematically Important Banks (SIBs).
Central Bank of Nigeria (CBN) spokesman Isaac Okorafor said he was yet to receive the report and would not comment. A spokesman of one of the banks said his lender would not source any fresh capital, but would rather capitalize its earnings. He pleaded not to be named.

The report said: “In our estimation, seven banks- FBN Holdings, Diamond Bank of Nigeria Plc, Heritage Bank Limited, Unity Bank Plc, First City Monument Bank Limited, Skye Bank Plc – would need to raise capital or aggressively capitalise earnings to stay within prudential limits in the next one year.”

According to the report, access to capital market for debt and equity financing remains tight due to the weak macroeconomic backdrop and investor sentiment even as profitability going forward will also be pressured as banks would be required to adopt International Financial Reporting Standards (IFRS) in reporting impairment charges from 2018.

It said the new accounting policy is much stiffer in that it forces early recognition of impairments. “We forecast NPL ratio to stay in double-digit in 2017 as the macro pressures persist whilst the delayed but certain adjustment of the currency in 2017 will further increase provisioning cost,” it said.

It said there were suggestions that regulators were considering another Asset Management Corporation of Nigeria (AMCON)-type bailout to acquire stressed assets, “but we doubt the feasibility of this, given the stretched finances of the federal government, already encumbered balance sheet of the CBN and the public backlash another bailout will generate”.

The report said the impact of the above factors had put pressure on the CAR of banks across all Tiers with four lenders currently below or at threshold of regulatory limit.

“To create a soft landing for banks and stabilise the financial system, the Central Bank of Nigeria (CBN) recently issued a regulatory guideline to allow a one-off write-off of already provisioned loans before the mandated one-year period. The CBN also took over a Tier-2 lender, Skye Bank, which fell four percentage points below the mandated CAR limit and below liquidity ratio guidelines.”

“The management of the bank was changed while the CBN injected N100 billion of liquidity to prevent a run on the bank. We also understand that a sizeable portion of the bank’s oil and gas loans have been restructured and the quality of the portfolio should significantly improve in subsequent months as oil prices rally,” the report said.

Continuing, it said despite the above situation, it did not believe that risk to financial system stability has materially reduced on account of the level of provisioning, both for restructured and un-restructured assets, is not adequate with Loan Loss Reserve/Non-Performing Loan ratio currently below 50 per cent and at a six-year low.

The report said Nigeria’s business cycle would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017, restore macroeconomic stability by rebuilding confidence in monetary policy and the administrative side of the forex market structure as well as showing commitments to structural reforms.

Afrinvest believes that activities in the Nigerian economy in 2017 will be broadly dependent on the Federal Government’s resolve to implement tough but necessary structural reforms in order to recalibrate the economy towards a path of recovery and rebuild confidence in monetary policy.

Said the report: “We note that oil prices which had hitherto overwhelmingly driven Nigeria’s business cycle will play a reduced role in the medium term. Despite the recent OPEC/Non-OPEC deal to cut production volumes, the balance of oil resources (between conventional low cost-drillers in OPEC countries and increasingly resilient and efficient shale producers) as well as diversification into clean energy in advanced countries suggests that structurally, the era of more than $80.00/b oil is over.”

It said the short to medium term outlook would be highly dependent on the ability of policy makers to deliver incremental oil output in 2017 while also reviewing the current structure of the currency market. “The 2017 budget, which is broadly optimistic, given current macroeconomic realities, will require the focused commitment of both the Executive and Legislative arms of government in order to get passed into law so that timely implementation can begin to achieve the objective of stimulating economic recovery through increased infrastructure spending,” Afrinvest said.

Nation with additional report from Upshot

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Maritime First