Experts Warn That Refund Of NNPC Funds May Trigger Liquidity Crisis

Nigeria’s banking industry could face significant liquidity pressures if the Central Bank of Ni-geria (CBN) enforces its directive that eight banks should refund the Nigerian National Petroleum Corporation (NNPC) funds into the Treasury Single Account (TSA), analysts at Exotix Partners, London, the world’s leading frontier markets investment bank have said. The apex bank had, last Tuesday, suspended nine banks from further dealing in foreign exchange transactions for failing to remit $2.3 billion belonging to the NNPC/NLNG to Federal Government’s coffers in line with the TSA policy.

Sources at the CBN said the lenders would not be readmitted into the forex market until they remitted all the outstanding funds and that further disciplinary actions awaited the erring banks when they finally remit the funds in full to the government’s coffers.

The CBN announced last Wednesday that it had re-admitted one of the lenders, UBA, into the foreign exchange market after the lender refunded its outstanding TSA deposits. However, commenting on the suspensions in a note they issued at the weekend, analysts at Exotix Partners, London, stated: “Given the magnitude of the figures being quoted, we think enforcement of the policy could potentially cause significant liquidity problems for some of the banks involved and that in turn could become a systemic problem for the entire sector.”

Besides, the analysts said: “The TSA repayments combined with the repayment of outstanding debt maturities will, in our view, significantly stretch banks’ dollar liquidity, especially since banks have little scope for liquidating their US$ assets (most of their US$ assets are in the form of loans to the oil & gas and power sectors, whose durations have been increased significantly in the past 18 months as part of efforts by banks to mitigate credit risk).”

They noted that although the $2.3 billion deposits represent 4.0 per cent of the industry’s total deposits, they contribute a significantly higher proportion of banks’ dollar deposits.

“We estimate the TSA deposits account for almost 25.1 per cent of banks’ total dollar deposits. With an average US$ loan-to-deposit ratio of 121.9 per cent, we believe banks’ US$ liquidity positions are already quite stretched,” the analysts stated.

According to the analysts, given that the affected banks do not have the required dollar liquidity to refund the TSA deposits and the foreign exchange market is not deep enough for the lenders to purchase the sums in the short term, the regulator would have to come up with another strategy of addressing the issue instead of trying to enforce compliance with its directive.

They suggested that a way out of the impasse would be for the CBN to sell the affected banks, dollars to cover existing (past due) trade obligations, on the understanding that the resulting liquidity would then be used to re-fund TSA deposits.

“This would enable (at least part) compliance with a directive that we assume is driven by the Presidency, with no net impact on reserves for CBN, and minimal impact on the exchange rate,” the analysts added. Stressing that the CBN may have to reverse itself on the issue, the analysts pointed out: “That, unlike the 2009 crisis, the issues that the Nigerian banks face is on their US$ balance sheet. Thus, unlike 2009, the CBN cannot bail out the sector by issuing and then monetising promissory notes (AMCON bonds). In case of a full-scale crisis, the banking sector will need a “hard currency” bailout which the CBN or Nigeria cannot afford. To put things in context, the aggregate TSA deposit of US$2.3 billion is almost 10 per cent of the country’s FX reserves.”

They further stated: “Given the current fundamentals of the country, we think the negative impact of a full scale banking crisis far outweighs any positive benefits that the government will accrue from additional US$ liquidity on its own balance sheet, (especially when the amount in consideration of US$2.3 billion is not that significant). We, therefore, think the CBN might re-consider its policy decision.”

Significantly, arguing that full and immediate implementation of the TSA is not possible, the analysts warned: “TSA implementation will only pile more (downward) pressure on the exchange rate.” Other experts including the Lagos Chamber of Commerce and Industry (LCCI) have faulted the CBN’s action, saying the move is already fuelling uncertainties, impacting negatively on investors and driving up the naira exchange rate, which has risen to N414 per dollar at parallel market and N318 to a dollar on the interbank as at the close of business yesterday.

Nigeria is currently facing one of its worst financial crisis in decades, coupled with inflation rising, the economy weakening and production of oil, which provides the bulk of export earnings, down since last February as militants attack pipelines.