Nigerian banks that hitherto issued dollar-denominated bonds may have started weighing the implication of the much-pushed foreign exchange (FX) rates unification as a decision that could increase their obligations on the outstanding notes.
Three banks – Access Bank, First Bank of Nigeria Limited and Ecobank Nigeria – have so far this year redeemed before maturity as much as $1.1 billion worth of outstanding Eurobond notes issued in 2014.
The latest is Zenith Bank, which recently recalled its outstanding 2022-dollar notes worth $500 million. This would bring the total value of early redemptions in 2019 to $1.6 billion.
Fidelity Bank plc’s $400 million outstanding Eurobond is due in October 2022, while UBA plc’s dollar notes worth N500 million are due in June 2022.
The early redemptions could be as a result of fears of an imminent currency adjustment that could increase obligations of these banks in domestic currency, according to research analysts at Lagos-based United Capital plc.
“With maturities of most of these Eurobonds scheduled for 2021-2022, the banks are likely pricing the next devaluation to happen any time from 2020,” United Capital analysts said in a recent note to clients.
The International Monetary Fund (IMF) recommends unifying Nigeria’s multiple foreign currency rates around the Investors and Exporters (I&E) FX rate. Angola, Guinea-Bissau, Iraq, Mongolia, Myanmar, Nigeria, Sudan, Trinidad and Tobago, and Ukraine are the only countries, based on IMF data, that have multiple exchange rate systems.
Many investment bankers are making strong case for a unified exchange rate regime.
Temitope Popoola, chief executive officer, Nigeria/West Africa at Renaissance Capital, said Nigeria has gone from a situation where “we had over five exchange rates to two”.
“Nigeria needs to go one step further and finally eliminate multiple exchange rates. Investment would be easier with converged FX rates and based on the trend of current rates, and the success of the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) window, this possibility is not that far-fetched,” Popoola said.
“Additionally, the liquidity management efforts of the CBN, by keeping Cash Reserve Ratio (CRR) at 22.5 percent, has helped keep rates relatively stable by reducing naira liquidity. Part of which could otherwise have pressured FX rates. Rates are converging and the difference between the different bands has tapered, partly due to efforts by the CBN but admittedly there is more they could do. Though, there are hard choices ahead of us and a significant fiscal element related to any attempt to further converge FX rates,” he said.
Wale Okunrinboye, head of investment research at Sigma Pensions, had told BusinessDay that when banks are recalling or redeeming their Eurobonds, “it is a signal that there aren’t many dollar lending opportunities in the economy”.
The Nigerian economy grew less than 3 percent in the last four years with a slower growth pace of 1.94 percent in the second quarter of the year compared with a revised growth of 2.10 percent recorded in the previous quarter. Dollar lending opportunities which predominantly abound in the country’s oil and gas sector have also come under pressure, no thanks to the lower crude oil prices in the international market.
For instance, foreign currency loans by Zenith Bank to the oil and gas sector, which stood at $1.82 billion in the first half of 2017, fell to $1.32 billion in the same period of 2018. In the first six months of this year, the dollar-denominated loan disbursed by the bank to the sector further dropped to $1.01 billion.
Prior to the 2014 crash in crude oil prices, some international oil companies (IOCs) such as Shell, Total, Chevron, and Eni divested their stakes in some onshore and shallow water assets in the country. This, among other deals, required dollar funding from the Nigerian banks.
However, “such transactions have reduced now locally”, said Omotola Abimbola, macro and fixed-income analyst at Lagos-based Chapel Hill Denham.
“There is no point holding on to dollar liabilities as a bank if you don’t have any major use for it,” Abimbola said. “The robust foreign currency deposits come at cheaper costs to the banks. The banks pay relatively low-interest rates on the dollar-denominated deposits and that’s another consideration for some of them.”
Since the private sector players are not demanding for the foreign currency-related loans because the macro conditions still look quite fragile, the banks felt this is the best time to make a call on those Eurobonds and focus more on naira-denominated loans, according to Gbolahan Ologunro, research analyst at CSL Stockbrokers Limited.
In addition to this, the redemption of Eurobond ahead of maturity is coming at a time when banks recorded significant growth in their foreign currency deposits and central bankers across the globe are adopting dovish monetary policy stance to shore up growth in response to rising concerns over a likely global recession.
Foreign currency deposits of First Bank of Nigeria Holdings accounted for 20 percent of total deposits in half-year 2019 as against 16 percent recorded in the corresponding period of 2018. Zenith Bank’s domiciliary deposits grew from 21.7 percent at end-year 2018 to 26.8 as at June 2019.
IHEANYI NWACHUKWU & OLUWASEGUN OLAKOYENIKAN
