Moody’s: Nigerian banks exposed to ‘very high’ foreign currency risks

Nigerian banks face challenges over a dollar shortage, according to the credit ratings agency.


Image : Adobe Stock / kehinde

Foreign currency risk is “very high” for Nigeria’s banking system, according to a report by credit rating agency Moody’s.

Nigeria is one of seven countries worldwide to be designated as very high risk, meaning that banks’ financial performance risks being severely impacted by changes in the exchange rate between the dollar and the naira. 

Banks in Nigeria are particularly at risk because of “the constrained availability of foreign currency liquidity in the country as a result of constraints on domestic oil production, capital outflows, and the increased cost of the country’s imported refined petroleum products, coupled with US dollar strengthening,” says Mik Kabeya, vice president for emerging markets banks at Moody’s.

On 25 October, Moody’s – one of the Big Three credit rating agencies alongside S&P and Fitch – downgraded the long-term ratings of nine Nigerian banks to B3 from B2, only four days after it downgraded the long-term issuer rating of the government of Nigeria.

At that time, the decision reflected “a combination of the weakening in the Nigerian government’s fiscal capacity to support the country’s banks in case of need,” and “banks’ significant holdings of sovereign debt securities.”

In reaction to dwindling forex reserves, Nigerian banks ramped up dollar rationing in a bid to protect their balance sheets. Last March, Zenith Bank suspended the use of naira cards for international ATM cash withdrawals and reduced the monthly card international spend limit for web transactions to $20 from $100.

“We understand that the central bank, which is the main provider of foreign exchange in the country, has become increasingly selective with its foreign currency allocations to the economy,” says Moody’s.

DRC and Angolan banking systems resilient

In the same study, Moody’s analysts identified two African countries in which banks are highly dollarised: the Democratic Republic of the Congo (DRC) and Angola.

Currencies in Angola and DRC have not significantly weakened against the US dollar, with the Angolan kwanza even strengthening by 10% between November 2021 and November 2022.

Yet FX positions can still deteriorate in times of stress, according to Moody’s. 

“Most banking systems in emerging markets have net positive FX positions…meaning that they post revaluation gains when their local currency depreciates. Such gains help offset the higher loan loss provisions related to FX loans. Yet the risk is that FX positions can deteriorate in times of stress because depositors tend to switch their local currency deposits into dollars or other hard currencies (or withdraw deposits altogether from banks) when the local currency depreciates sharply. This amplifies currency mismatches between the banks’ assets (typically loans) and liabilities (typically deposits). When banks have more FX liabilities than FX assets, a weaker local currency creates accounting losses that deplete the banks’ capital.”

In Angola, high oil prices and recovering oil production have contributed to a rapid decline in the public debt-to-GDP ratio and a sharp appreciation of the kwanza. 

However, the volatility of the oil market makes Angolan banks vulnerable to external shocks: last week, oil slumped to the lowest level in a year, weighed down by risk aversion in commodity markets amid protests in China over the authorities’ strict Covid-19 policies.

Meanwhile, three weeks ago Moody’s upgraded DRC’s long-term local and foreign currency issuer ratings from B3 from Caa1 and changed the outlook to stable from positive.

The agency said it “recognises the country’s strengthening economic and fiscal prospects fostered by institutional improvements supported by the IMF programme that started in July 2021.” 

“The high level of dollarisation in the Democratic Republic of Congo poses limited refinancing or asset quality risks, given that DRC banks have limited foreign currency mismatches – since most assets and most liabilities are denominated in foreign currency – and most foreign currency borrowers generate foreign currency revenues. However, the high dollarisation limits the ability of the local central bank to provide liquidity support in case of need. In addition, the high dollarisation would also pose risks to capitalisation in case of a devaluation of the local currency, as a devaluation would increase risk weighted assets by inflating the local currency value of loans extended in foreign currency,” says Kabeya

In addition, DRC’s creditworthiness is constrained by a deteriorating political risk environment. In recent weeks, fighting between the government and the M23 rebels has intensified in the North Kivu region, while political tensions with Rwanda reached a spike as Kinshasa accuses its neighbour of supporting the insurgents.

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