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Naira devaluation: Traders on the wrong side criticising Nigeria – Moody

By Omoh Gabriel, Business Editor

As financial egg heads across the globe are preparing to meet in Lima for this year’s IMF/World Bank Group Annual Meetings, the Banker Magazine took a pre-IMF review of the Nigeria economy with Jean-Francois Tremblay, Associate Managing Director, Moody’s. The Banker Magazine is a subsidiary of Financial Times of London. Here are his views.

There has been disappointing GDP numbers for the second quarter of this year for Nigeria. Just how tough things are now for the Nigerian economy?

Indeed, Naira devaluation is probably the most potent weapon against the prosperity of Nigerians. Nigeria’s migration from a potential industrial power house with bustling social affluence, to a subdued and stumbling economy clearly began with the adoption of IMF’s Structural Adjustment Programme during Babangida’s regime: the chorus from International Agencies, at that time, was also that falling oil prices with an unserviced debt burden and the consequent restriction of trade credit to Nigeria, were the products of an allegedly overvalued Naira exchange rate.
File: Indeed, Naira devaluation is probably the most potent weapon against the prosperity of Nigerians. Nigeria’s migration from a potential industrial power house with bustling social affluence, to a subdued and stumbling economy clearly began with the adoption of IMF’s Structural Adjustment Programme during Babangida’s regime: the chorus from International Agencies, at that time, was also that falling oil prices with an unserviced debt burden and the consequent restriction of trade credit to Nigeria, were the products of an allegedly overvalued Naira exchange rate.

The Nigerian economy is in a tough spot right now. The low oil price environment is obviously hitting oil exporters themselves, but also the government is quite dependent on oil revenue. In addition to having this primary level sort of impact, there is another kind that arises from the very policies that government is putting in place to deal with the situation.

More particularly here, comes in mind, the devaluation of the naira and invariably in that context, investors have lower confidence, there is delayed investment, consumption is lower, the banks are lending less and all of these are contributing to the reinforcing of the dynamics.

But for the time being, we think that there will be low economic growth, loan growth at the banks a little while, the banks will still go through a rough patch. But in the longer term, towards the end of 2016 and further out, I think that the situation will stabilise as low naira will typically help export.

What is your take on the way the Central Bank of Nigeria has approached the naira irrespective of falling oil prices?

Nigeria does not have the luxury that some oil exporters in the Gulf, for instance, have. Gulf oil exporters have very large wealth fund committed for the year which they can use to keep up spending.

Nigeria has relatively moderate reserves, with no fiscal buffer to speak of; therefore it opted to use currency devaluation to manage the situation. While it does that effectively and protect its own asset composition, but of course, there are traders who always found themselves on the wrong side of the process who criticised the situation in this case with the depreciation of the naira, inflation that is high, interest rate that is being kept fairly high to contain further inflationary pressures on households and consumption.

To what extent has Nigerian banks been hit by the falling oil prices and what kind of opportunity do you think are still there moving forward?

The direct exposure of the banks to the oil industry is not our major concern right now. We have to keep in mind that while the government remains dependent on oil industry for 80 to 85 per cent of its revenue, the banks’ exposures are much smaller. The loan books of Nigerian banks are relatively small when compared to the size of the balance sheet and very large amount of government securities which it offers and which they get decent returns on.

The fact that government’s measures are geared towards protecting government owned assets has some positives because the banks are exposed to government as well. With respect to their exposures to the oil industry, we have some disabilities on who they are exposed to. But we get some comfort in the very fact that they lent mostly to some very large oil companies that have more financial flexibility than the others.

We are more concerned about smaller portion that maybe represents 3 or 4 per cent of the loan books of the banks where the loans are smaller and in weaker firms. When we look at the type of buffers that the banks have, we think that it’s a bankable exposure.

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