July 25, 2017
In perhaps another sign of improving dollar liquidity, banks are gradually rekindling their appetite for foreign assets, as their holdings rise for the first time in four months, after a difficult year that has seen straight declines since February.
Net foreign assets of the banking system, at N8.5 trillion, rose by 17.5 per cent at end-May 2017, in contrast to the 4.7, 11.4 and 11.2 per cent declines in April, March and February respectively, according to data compiled by BusinessDay and sourced from the Central Bank's economic report for May.
"It points to improving foreign trade activity," Bismarck Rewane, CEO of financial advisory firm, Financial Derivatives, said of the development.
"People are gradually importing again and banks are opening more letters of credit, on the back of increased foreign exchange availability.
"Our trade flows and oil revenues have relatively increased and the CBN has become more transparent in distributing foreign exchange," Rewane said in Lagos.
Nigeria, in its first recession in 25 years, has been hammered by dollar shortages, brought on by a collapse in global oil prices and a reduction in production, after militants blew up energy facilities in the oil rich Niger-delta. Price and production levels have however recovered to some extent.
In May, oil prices averaged $52 per barrel, from an average of $38 in 2016, while production rose some 10 percent to 1.6 million barrels daily, according to OPEC data.
Despite the rise in May, banks' foreign asset holdings are yet to recover to 2014 levels, when oil prices were in the region of $100 per barrel, dollars were easier to access and the economy was in relatively good shape.
The slowdown in importation, acute dollar shortages and the collapse of trading on the interbank foreign exchange market, affected the banks' ability to hold foreign assets over the last 16 months, according to Johnson Chukwu, CEO of Lagos-based financial advisory firm, Cowry Assets.
"However, the newly introduced Investors' and Exporters' window, where the CBN has been more flexible, is seeing increased levels of activity and has also spurred appetite for holdings of foreign assets again," Chukwu said by phone.
Over the level at end-December 2016, foreign assets (net) declined by 6.7 per cent at end-May 2017, compared with the decline of 20.6 per cent and 7.9 per cent at the end of the preceding month and the corresponding period of 2016, respectively.
"The development reflected decline in the foreign asset holdings of the CBN and DMBs," the CBN report read.
Banks are beginning to build firepower to fund foreign trade as dollar liquidity improves and exchange rate volatility abates, a senior bank source who did not want to be named, said.
"The recent trend in Eurobond sales shows that banks see opportunities in trade financing and are building buffers," the source said.
"We have seen an improvement in the number of letters of credit, bills being settled and remittances being allowed," the source added.
In May, Nigeria's second-biggest bank, Zenith, issued a USD$500 million senior bond, due May 2022 with a yield of 7.375 percent, in a deal that was four times oversubscribed.
UBA, the third-biggest lender by market value, also raised USD$500 million in its first Eurobond sale on June 1 at yields below initial guidance.
Diamond Bank also sold USD200 million in 5-year Eurobonds, which pay a coupon of 8.75 percent.
Nigerian banks are also boosting dollar-spending limits for payment cards denominated in local currency, as much as tenfold because of improved foreign-exchange supply.
Guaranty Trust Bank, the country's biggest bank by market value, raised the maximum amount a holder of its naira Mastercard can spend abroad in a month, to $1,000 from $100.
Ecobank Transnational Inc. has set a $1,000 per month limit from $100 while FCMB Group Plc will start implementing its new spending limit of $500 per month this week, according to their officials.
Nigerian lenders cut or suspended foreign payments using naira cards in 2015 and 2016 as a decline in the price and output of oil, the country's main export, caused a plunge in foreign income and prompted the Central Bank of Nigeria to introduce controls to reduce dollar demand.
The Central Bank's creation of a market-determined foreign-exchange trading window for investors and exporters in April has increased banks' access to dollars.
"The change in the withdrawal limit is another signal that banks are less concerned about foreign exchange liquidity than before,'' London-based Exotix Capital, said in a July 14 note to clients.