Nigeria hikes rates to lift naira, fight inflation
Abuja (AFP) – The Central Bank of Nigeria (CBN) on Tuesday raised its benchmark interest rate to 14 percent from 12 percent in move to stabilise the country’s currency, the naira, and tame soaring inflation.
CBN governor Godwin Emefiele told reporters the monetary policy committee which meets every two months “voted to increase the MPR (interest rate) by 200 basic points from 12 percent to 14 percent.”
MPR is the benchmark rate at which the CBN lends to commercial banks and it has been a key instrument in stabilising prices.
Financial analysts welcomed the decision.
“Given the cost-push nature of inflation in Nigeria, which largely stems from the shortage of foreign exchange, we believe that this was the right thing to have done,” said Razia Khan of Standard Chartered Bank.
“Today’s monetary policy decision demonstrates a commitment to foreign exchange liberalisation, which alone will undo some of the bottlenecks that have contributed to inflation,” Khan added.
Inflation hit an 11-year high of 16.5 percent in June as prices of food and energy jumped after the government freed up the naira currency in April, allowing it to plummet against the US dollar.
Nigerians are struggling with spiralling cost of living after a 67 percent hike in the price of petrol in April and last month’s scrapping of the peg of the naira exchange rate at 197/199 to the dollar.
The naira now trades at around 370 to the dollar on the black market. The official rate is at about 300 to the dollar.
The International Monetary Fund said last week it expected Nigeria’s economy to contract by 1.8 percent in 2016 after having forecast a 2.3-percent expansion in April, but the finance Minister Kemi Adeosun said there was nothing to worry about.
Nigeria, one of Africa’s main oil producers, normally gets 70 percent of its revenue from oil sales. But the global fall in crude prices since mid-2014 has left the government cash-strapped and even unable to pay wages.
The nation’s economic woes have been exacerbated by sabotage to oil and gas facilities in the oil-producing south by militants wanting self-determination for the delta region.
Nigeria: The oil crash has people worried about a new banking crisis
Speaking to reporters on Monday, the central bank’s governor, Godwin Emefiele, asserted that Skye Bank “is not in distress and remains a healthy bank in the system.” And on Wednesday, the central bank said that all its banks are safe, and that “there is, therefore, no need for panic withdrawals from any bank,” according to Bloomberg’s Wallace.
However, these comments haven’t been enough to alleviate worries about the rest of the country’s banking system.
“This development may raise fears about the health of Nigeria’s entire banking sector; especially given the weak economic growth expected in 2016 (we forecast just 0.8% GDP growth this year),” Bank of America Merrill Lynch’s Africa economist Oyin Anubi wrote in a note to clients on Wednesday.
The Central Bank of Nigeria announced earlier this week that it’s replacing the management of the country’s eighth biggest lender by assets, Skye Bank, after it failed to meet the minimum capital ratios, according to Bloomberg’s Emele Onu, Renee Bonorchis, and Paul Wallace.
Data from the Nigerian Bureau of Statistics released in late May revealed that the country’s economy shrank way more than expected in the first quarter — by 0.4% year over year. Analysts promptly warned that these numbers suggested the country is headed for a “full-blown economic crisis.”
Banks in particular have been feeling the pain from the oil sector slump, given that the sector gives about 26% of its loans to oil and gas companies, according to December 2015 data cited by Anubi.
Notably, in this environment, Anubi argued that nonperforming loans are “likely to continue the upward trend on weak growth.” Here’s what he wrote in his note to clients (emphasis ours):
“In the course of 2016, it is likely that a significant part of the rise in NPLs will be due to problem loans in the oil sector. Some banks have been proactive in this arena. In December 2015, Moody’s claimed that 20% of oil and gas loans had already been restructured with maturity extensions and we expect that these activities have continued this year. However, there is a possibility that the downturn in the oil and gas sector (and in the overall economy) seen so far this year is worse than the banks anticipated, implying that there could be more pain ahead.
“The operating environment in Nigeria is difficult. In S&P’s most recent review of the sector the rating outlook was revised to negative for six banks, mainly due to low oil prices, weak growth, FX shortages, higher cost of risk, liquidity pressures and falling asset quality. They expect NPLs to rise to 6.0% in 2016 from 5.5% in 2015, above the prudential CBN ceiling of 5.0%. Data from Q16 results of the largest banks shows average NPLs of 7.0%. History shows that lower oil prices tend to lead to higher NPLs. However, this time, the recovery in oil prices will to some extent be offset by lower oil production.”
As for Skye Bank, its market value has plunged by more than 85% over the past five years and is down about 40% in 2016 alone, according to Bloomberg.
The central bank had deemed Skye Bank “systemically important,” but, as Anubi points out, “this bank is only 4% of total industry assets. Nigeria’s larger banks look better capitalized.”
According to local press reports cited by Anubi, most of Nigeria’s larger banks have stronger capital adequacy ratios than Skye Bank. The latter’s is reportedly below the 15% minimum requirement, while other large banks are, on average, at 19.9%.
In any case, Nigeria’s banking system might be something to keep an eye on.
