- Moodyâ€™s: Higher oil prices to moderate banksâ€™ foreign currency risks
The value of foreign investorsâ€™ holdings of Nigeriaâ€™s local debt instruments rose significantly to $16 billion as of the end of March, signposting the renewed investor confidence in the country.
The International Monetary Fundâ€™s Mission Chief to Nigeria, Mr. Amine Mati, who disclosed this while making a presentation at the Moodyâ€™s Investors Service Fourth Annual West Africa Summit titled: â€˜Nigeriaâ€™s Recovery: Slow and Sturdy,â€™ that took place in Lagos yesterday, put the value of foreign investorsâ€™ holdings in domestic debt instruments in Nigeria previously at about $4 billion.
In addition, he said Nigeriaâ€™s equities market has also seen increased interest by foreign investors.
â€œThe number of investors that keep coming to my office (to make enquiries about investing in Nigeria) keeps rising.
â€œLast year, foreign holdings of local debt was about $4 billion, as at the end of March this year, foreign holdings of local debt was $16 billion, which shows a lot of interest in the country,â€ he explained.
Mati added: â€œThe good news is that Nigeria is out of recession. Another good news is the stability in the foreign exchange market. February 2017 was the peak when we had the exchange rate at N520 to a dollar, the official rate at N305 to a dollar and we had different windows.â€
He commended the Central Bank of Nigeria (CBN) for introducing the Investorsâ€™ and Exportersâ€™ (I & E) foreign exchange window in April last, which he said also contributed to the increased investor confidence in the country and the accretion recorded by the countryâ€™s forex reserves currently at a four-year high of about $48 billion.
Nevertheless, he reiterated the position of the IMF that Nigeria was exposed to oil price volatility as well as its high debt level.
Furthermore, Mati expressed concern about the slim Gross Domestic Product (GDP) growth of 0.8 per cent recorded by the country in 2017. He pointed out that save for the oil and gas as well as the agric sectors, other sectors had not picked.
He stressed the need to enhance non-oil revenue mobilisation in the country, that in Nigeria, Debt-to-GDP ratio is not an issue, but the high level of debt service.
Meanwhile, Moodyâ€™s Investors Service in a report published wednesday stated that the outlook for the Nigerian banking system remains stable as banksâ€™ foreign currency liquidity risks moderate due to rising oil prices and a more liberal forex policy.
It rating agency stated this in a report titled: â€œBanking System Outlook -Nigeria; Liquidity risks have eased but earnings pressure and loan quality risks remain.â€
It stated that despite the stabilisation in banksâ€™ foreign currency funding and liquidity profiles, Moodyâ€™s expects bank earnings to come under pressure. It projected that capital metrics would also decline marginally over the 12 to 18 month outlook period.
Additionally, asset quality was estimated to remain weak, adding that a further deterioration in loan performance would be marginal as operating conditions slowly improve.
â€œOperating conditions for the Nigeriaâ€™s banks will continue to gradually improve over the next 12 to 18 months, but remain challenging,â€ Vice President and Senior Credit Officer, at Moodyâ€™s, Akin Majekodunmi said.
He added: â€œNigeriaâ€™s growth prospects remain vulnerable to global oil prices, as crude oil will remain the country largest export commodity and its main generator of foreign currency for the foreseeable future.â€
Moodyâ€™s anticipated a recovery in Nigeriaâ€™s real GDP growth over the next two years, up from 0.8 per cent last year. This, is expected to boost lending to around 10 per cent after a 15.4 per cent contraction in 2017.
â€œNigerian banksâ€™ profitability will nevertheless decline on account of lower yields on government securities, as well as a likely reduction in income from derivatives. However, these pressures will be partially offset by a recovery in loan growth and transaction income from the expansion of digital platforms.
â€œMeanwhile, nonperforming loans and associated provisions in the banking system will increase marginally in a delayed response to sluggish economic growth experienced last year, and Moodyâ€™s expects them to range between 15.5 per cent and 18 per cent of gross loans over the outlook period,â€ it added.
However, in a separate report titled: â€œOil-driven recovery supports modest improvements in credit profiles; fiscal pressure persists,â€ also released yesterday, noted that persistent and growing fiscal deficits were largely responsible for Nigerian states carrying a substantial debt burden.
According to the report, Nigerian states receive approximately half of their revenue from the federal government, which in turn is heavily dependent on oil and gas revenue. â€œBecause own-source revenue remains relatively weak, we expect state governments to remain dependent on federal government transfers.
â€œThe extra oil revenue generated by higher oil prices and production will mainly be used by states and local governments to repay some of the existing stock of arrears accumulated over the last few years.
â€œCapital spending, which accounts for almost half of the regionsâ€™ total spending, is likely to remain constrained. And we expect healthcare-related spending pressures to offset lower capital spending at the regional level, which will keep regional governmentsâ€™ deficits and debt levels elevated,â€it stated.
Moodyâ€™s also anticipated that corporates would expand capital spending on the back of improving access to US dollars as well as the recent $2.5 billion currency swap agreement between Nigeria and China.
According to the firm, many Nigerian corporates using Chinese equipment and inputs would benefit from this dedicated currency window when it comes to meeting their capital expenditure needs.
â€œWe expect Dangote Cement Plc to expand its activities given returning demand for cement in Nigeria and increasing demand in neighbouring West African countries and easier access to US dollars required for expansionary capital equipment.
â€œDangote Cement uses Chinese trucks and other Chinese equipment in its operations. Based on 2017 trend lines, but also factoring in the increase in US dollar linked capital expenditure in naira terms, we expect that the fast-moving consumer goods firms will likely continue to expand to increase capacity or consolidate recent years of expansion.
â€œThis sector includes corporates such as Dangote Flour Mills Plc (unrated), Dangote Sugar Plc (unrated) and Nestle Nigeria Plc (unrated). Similarly, given the high average realized oil price and the prospect of increased investment in exploration and production (E&P), we expect that the indigenous independent E&P companies, such as Seplat Petroleum Development Company Plc (B2 stable), will look to expand their activity.
â€œSuch companies are likely to grow both organically and through acquisitions. Despite the improved outlook for the overall sector, challenges remain.
â€œWe expect an eventual drop in demand for the US dollar after 2020, as more refined oil-related products are sourced domestically, which may lead to the eventual unification of the different foreign exchange windows at the central bank,â€ the report added.