(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong/London-August 22: The Central Bank of Nigeria's (CBN)
recent attempts to boost economic activity through incentives to bank lending
jar with its goal of maintaining a stable exchange rate, Fitch Rating says.
Attempts to reconcile competing goals through unconventional macroeconomic
management and weaknesses in policy settings are raising medium-term
vulnerabilities to shocks, which could make the economy more exposed to falling
oil prices or disruptions to hydrocarbon production.
Tight management of domestic liquidity has been the key pillar of Nigeria's
exchange-rate policy in recent years. However, several recent measures to boost
lending have contributed to a temporary loosening of domestic financing
conditions. This has combined with falling oil prices and deteriorating investor
sentiment towards emerging markets to put pressure on the naira. The measures,
announced by the CBN in July, included a requirement for banks to have a
loans-to-deposits ratio of at least 60% at end-September and tighter
restrictions on the amount of remunerable deposits that banks can park at the
central bank.
Exchange-rate pressure led the CBN to resume its liquidity tightening operations
this month by auctioning Open Market Operations (OMO) bills, and to increase the
supply of foreign currency, releasing about USD800 million from its
foreign-currency reserves between mid-July and mid-August. (Foreign-currency
reserves were USD44.2 billion at 19 August.) These moves have contributed to a
rebound in domestic interest rates and limited the depreciation of the naira on
the Investors' and Exporters' FX Window to 1% since end-June.
The competing goals of preserving naira stability and supporting Nigeria's
fragile recovery are pushing the CBN towards increasingly complex policy
measures, with a risk of aggravating external vulnerability or causing
macroeconomic distortions. We expect the CBN to continue to pursue a combination
of tight liquidity management, segmented exchange-rate markets, and
foreign-exchange (FX) interventions and restrictions. It will be aided by ample
international reserves of more than six months of expected 2019 current account
payments, and a small current account surplus conditional (we estimate) on Brent
prices averaging at least USD60 a barrel.
However, the CBN's policy of auctioning OMO bills to non-residents has led to a
rapid build-up of short-term external liabilities with non-resident holdings of
these bills amounting to USD15.8 billion (4% of GDP) at end-April, equivalent to
a third of reserves. This generates meaningful rollover risks, which could
necessitate persistently high interest rates, holding back growth and increasing
the government's debt-servicing costs.
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Furthermore, the CBN has recently moved to intensify restrictions on FX access
for imports that were imposed in 2015. Milk and dairy products have reportedly
been added to the list of 42 categories of products subject to restrictions on
access to FX. Nigeria's president, Muhammadu Buhari, recently called on the CBN
to restrict FX access for all food imports, but the scope, modalities and
timeline of such measures remain unclear.
FX restrictions are unlikely to foster an expansion in domestic food supply, in
our view, as Nigeria's agriculture and food industries suffer from deep-seated
challenges from infrastructure gaps, communal conflicts, insecurity and weather
hazards. Instead, these restrictions could push more traders towards the
informal economy and compound inflationary pressures.
Inflation at about 11% already raises the risk of an overvaluation of the real
effective exchange rate, which could put more pressure on the naira and increase
the risk of a sharp adjustment following an oil price shock. Withdrawal of
portfolio investors would aggravate potential balance of payment pressures.
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We affirmed Nigeria's Long-Term Foreign-Currency Issuer Default Rating at
'B+'/Stable in June. High dependence on hydrocarbons, subdued GDP growth, high
inflation and weak governance indicators are key rating constraints, balanced by
a large economy, a record of current account surpluses and a relatively low
general government debt-to-GDP.
Contact:
Mahmoud Harb
Director, Sovereigns
+852 2263 9917
Fitch (Hong Kong) Limited
19/F Man Yee Building
68 Des Voeux Road Central
Hong Kong
Jan Friederich
Senior Director, Sovereigns
+852 2263 9910
David Prowse
Senior Director, Fitch Wire
+44 20 3530 1250
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
peter.fitzpatrick@thefitchgroup.com.
The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article can be accessed at www.fitchratings.com.
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