UPDATED: CBN could delay repayment on $10.4bn forex loan – Moody’s

The Central Bank of Nigeria’s repayments on a cumulative $10.4 billion forex loan from banks could take longer than agreed, rating agency Moody’s said Thursday.

The development comes as Nigeria faces a dollar crunch that threatens lenders’ liquidity and could ultimately weaken their capital.

If Nigeria chooses to fully honour its dollar obligations, the payments would wipe off almost one-third of the foreign reserves of Africa’s largest economy, which stood at $36.8 billion as of 14 February.

“The concern the report is highlighting here is that there is a lot of foreign currency pressure here and there, oil revenue is not coming as expected and all that,” a Lagos-based credit analyst, who doesn’t want his name mentioned, told PREMIUM TIMES.

“The chance that it will happen is very slim but if it does happen, it has to put a lot of strain on banks and their FX liquidity position.”

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The money the CBN owes the banks are funds in the form of derivative transactions comprising forwards contracts and swaps, according to Lynn Merhi and Mik Kabeya, analysts at Moody’s.

“The central bank has a strong track record of repaying the FX it owes to the banks, but at a time of acute FX shortages, there is increased risk that it would extend the life of some contracts, postponing repayment,” Moody’s said in a note.

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That could pressure lenders and complicate the liquidity crisis should the companies they supply forex by way of trade finance default, according to the rating agency.

The lending by Nigerian banks for trade finance purposes last year came to $9.8 billion, meaning it made up more than half of banks’ liquid foreign exchange assets.

“A material delay in repayment could lead to the banks facing their own foreign-currency shortages and could constrain their ability to repay their own foreign currency liabilities,” Moody’s stated.

Companies get trade finance facilities from lenders to import or engage in international trade.

The process requires them to apply to the CBN for foreign exchange which often takes a while, often causing them to approach banks thereafter to meet that need pending the time the apex bank releases the fund. When the CBN provides the money, it goes to the banks to settle the exposure.

“At the end of the day, the banks will get the brunt of it because, on the one hand, you have raised a commitment to an international counterparty abroad that if this guy doesn’t give you your money on so so date I will be the one to give it to you,” the Lagos-based credit analyst said.

“So if a company that is into imports default on its obligation, the bank will have to step in. Meanwhile if the CBN also defaults, if it doesn’t give the banks their FX when they want it, the bank is pressured. Ultimately, the bank is at the receiving end.”