For the first time in seven months, the dollar fell below the psychological N400 barrier, when the greenback traded at N399 to the dollar in Lagos and exchanged at N395 in Abuja, lower than N410 at which it traded on Tuesday. With the gains made by the local currency in the last five weeks, the naira inched closer to one of the Central Bank of Nigeria's (CBN) key foreign exchange policy objectives of an exchange rate convergence. The naira trades for N375 to the greenback for invisibles and at N307 to the dollar on the FX interbank market, the official window for manufacturers and importers of raw materials eligible to buy FX from this segment of the market.
The last time the naira traded at between N395 and N400 to the dollar on the parallel market was in August 2016. The significant gains made by the naira on the parallel market, according to market analysts, was a reflection of the improved confidence in the FX market, following the sustained dollar interventions by the CBN since last month. One analyst also attributed the gains made by naira to the Bureau de Change (BDC) operators that are awash with dollars and with little or no customers to patronise them. He said several retail customers who used to resort to the BDCs (which realistically fund the parallel market) to fund invisible transactions now get to buy dollars at a lower rate from the banks.
"The BDCs are awash with cash. Remember that the central bank sold about $200,000 to each BDC at some point and they had also bought dollars at high rates which they hoarded, thinking that the naira would remain in a free fall. "But with the CBN's intervention, they are stuck with loads of dollars and little or no customers, so they have stopped buying dollars and are looking for avenues to offload what they bought at ridiculously high rates. "Essentially, the speculative attacks on the naira has come back to haunt them and they've got their fingers burnt," he said.
In all, the central bank has auctioned a total of $1.895 billion through forward sales, as well as targeted intervention for invisibles. This amount does not include its daily intervention of $1.5 million on the interbank market. The CBN Governor, Mr. Godwin Emefiele, on Tuesday expressed optimism about the convergence of the FX rates on the official and parallel markets, stating that the gains made by the naira against the greenback in the last five weeks was not a fluke.
Emefiele said he was happy that the central bank's intervention was yielding positive results. "I am happy, indeed very gratified, that the interventions have been positive, we have seen the rates now converging and we are strongly optimistic that the rates will converge further. "In terms of sustainability, I think it's important for us to say that the foreign reserves at this time are still trending upwards to almost $31 billion as I speak with you. "And the fact that we have done this consistently for close to five weeks, should tell everybody or those who doubt the strength of the central bank to sustain this policy," he had said after the meeting of the Monetary Policy Committee (MPC).
But an analyst at Ecobank Nigeria, Mr. Kunle Ezun, who welcomed the development in the FX market, pointed out that achieving a convergence between the official (interbank rate) and parallel market rate would be a more onerous task. "For us to have a convergence between the interbank and parallel market, it would require the CBN to devalue the official exchange rate to about N350 to the dollar. "Without that, I don't see how the official and parallel market rates can converge. Maybe what the CBN governor was talking about is achieving a convergence between the parallel market rate and the rate for invisibles, which is N375 to the dollar.
"But what the CBN has done in the last one month has really helped the parallel market rate. But we need to see improved liquidity on the interbank market," Ezun said in a phone chat with THISDAY.
Sarah Alade Bows Out
In another development, the Deputy Governor of the CBN, Economic Policy, Dr. Sarah Alade, retired on Wednesday and urged Emefiele to uphold the credibility of the bank. Alade, who for four months served as the acting governor of the central bank, following the suspension of the former CBN governor, Sanusi Lamido Sanusi, now the Emir of Kano, also recalled a dark period during her stint when the central bank had "four governors". Alade spoke at a send off held at the CBN headquarters in Abuja that had in attendance Emefiele; the Minister of Finance, Mrs. Kemi Adeosun; Minister of Budget and National Planning, Senator Udoma Udo Udoma; and officials from the International Monetary Fund (IMF) and World Bank, reported the News Agency of Nigeria (NAN).
Sanusi, in February 2014, was suspended by former President Goodluck Jonathan over allegations of financial recklessness and misconduct. This happened after Sanusi had claimed that the Nigerian National Petroleum Corporation (NNPC) had not remitted $20 billion from crude oil earnings to the treasury. "Throughout my period at the bank, I had one slight regret and that's during the period I was the acting governor. It was the time that the CBN was being investigated. It had never happened before that the activities of the CBN were under investigation."We went for the IMF meetings and when we met with investors, they asked us 'what is happening? We understand that there was some financial mismanagement in the CBN'. It was humiliating. "I think for me, that was a low point. The credibility of this institution was eroded.
Sharing her experience as acting governor, Alade explained that the investigation had paralysed activities at the bank. "I remember that during that period, I was reminded every morning that we had four governors. "The suspended governor, the governor-in-waiting, the acting governor and the investigating governor. "I remember that the investigating governor told us that there should be no initiative, no payment, no decision-making, nothing. The only thing we could do was to just maintain the bank."So the bank was sort of paralysed. We could not do anything. For me, it was a humiliating experience, but we did the best we could," she said. The persons Alade was referring to were Sanusi - suspended governor; Emefiele - governor-in-waiting; Alade - acting governor; and Mr. Jim Obazee - investigating governor, who at the time was the Executive Secretary of the Financial Reporting Council of Nigeria (FRCN).
Obazee, who was recently fired by President Muhammadu Buhari, had written a damning report on the bank's 2011 and 2012 audited financial accounts under Sanusi's stewardship. At the send off for Alade, Emefiele described her as "a friend, colleague and a woman of extreme virtue". He applauded her for her hard work and the 23 years she had served at the central bank. Similarly, Adeosun described the retiree as one of the brilliant and inspiring Nigerian women in the financial sector.
In her capacity as the Deputy Governor, Economic Policy, a post she held for 10 years, Alade served on the teams on major economic policy studies and was involved in the preparation of the CBN's Monetary and Credit Policy proposals over the years. She was actively involved in the drafting of the Medium Term Economic Programme for Nigeria and the IMF Staff Monitored Programme/Standby Arrangement. She was also a member of the Technical Committee on Vision 2010 and is currently a member of the Technical Committee on Vision 2020, as well as the National Economic Management Team.As deputy governor, Alade superintended over the Economic Policy Directorate, comprising the Research, Monetary Policy, Trade and Exchange, Statistics Departments and the Financial Markets Department. As chair of the Monetary Policy Implementation Committee, she interfaced with operational departments and coordinated technical inputs for the Monetary Policy Committee of the CBN.
Fitch: Banks Continue to Face Headwinds
Meanwhile, Fitch Ratings on Wednesday said Nigerian banks would continue to face challenges this year, following the extreme difficultly they faced in 2016. The ratings agency, in a report on Nigerian banks, pointed out that the financial institutions faced multiple threats from the operating environment in 2016, including Nigeria sliding into recession, the economy continuing to suffer from low oil prices, and severe shortages of foreign currency (FC).
Consequently, banks struggled with declining operating profitability (excluding translation gains), sluggish credit growth, fast asset quality deterioration, tight FC liquidity and weakening capitalisation, putting increasing pressure on their credit profiles.Fitch stated that the "outlook for the rest of 2017 is not much brighter. We believe that the banks will continue to face extremely tight FC liquidity despite the authorities' best efforts to normalise the foreign exchange (FX) interbank market and improve the supply of US dollars".
It added: "Importantly, deliveries under the CBN's FX forward transactions since first half of 2016 have helped the banks access US dollars and reduce a large backlog of overdue trade finance obligations to international correspondent banks."However, given the severity of the FC liquidity issues, refinancing risk remains at the top of our perceived risks for the sector, especially as some banks have large Eurobond maturities in 2017/2018."Fast asset quality deterioration is in line with our expectations given the macro challenges and the continuing issues in the oil-sector.
"Oil-related impaired loans (NPLs) are high and this excludes large volumes of restructured loans. Other industry sectors contributing to NPLs include general commerce and trading, which have been affected by both the naira depreciation and FC shortages."For the Fitch-rated banks, we believe the NPL ratio could rise to 10%-12% by end of first half 2017 (this remains lower than the CBN's reported figure for the entire sector).
"As a one-off policy change, the CBN allowed banks to write off all fully reserved NPLs by end-2016. Together with significant loan restructuring (particularly in the oil sector), this will ease pressure on NPLs for now, in our view."Slower economic growth and a lower risk appetite from banks will continue to translate into subdued credit growth and weak core earnings generation in 2017."Loan growth averaged 25% in 9M16, but this was due to the currency translation effect post-devaluation as about half of sector loans are in FC."
According to Fitch, loan growth was negligible in constant currency terms, adding that banks' 2016 profitability was underpinned by large translation gains booked on net long FC positions following the naira devaluation."Excluding these, some banks would have reported a significant fall in operating income. Regulatory capital ratios are high from a global perspective, but remain under pressure due to inflated risk-weighted assets (due to the FC translation effect) and lower core retained earnings.
"In our view, there is a limited margin of safety as some banks could very easily breach minimum regulatory requirements in the event of further naira depreciation and/or weaker asset quality," it added. The agency observed that the Long-Term IDRs of all Nigerian banks are in the 'B' range, indicating highly speculative fundamental credit quality.The low ratings, it noted, reflect the significant influence of the weak operating environment, which overshadows other rating factors. "The banks' IDRs are driven by their Viability Ratings, Fitch's assessment of their standalone creditworthiness.
"Following a re-assessment of potential sovereign support available to the banks in 2016, Fitch believes that sovereign support cannot be relied on given Nigeria's (B+/Negative) weak ability to do so in FC. "As a consequence, we removed sovereign support from the Long-Term IDRs. Overall, the largest Nigerian banks with stronger and more diverse business models, high revenue-generating capacity and stronger liquidity profiles appear to be coping better than smaller banks on most metrics."However, tail risks remain high for all banks due to their sensitivity to concentration risk," it said.