*Forbearance on financial assets of banks
By Emeka Anaeto, Business Editor
By end of this week, the Nigerian economy would be completing its second month under an unprecedented stimulus regime. The businesses which are just wriggling out of a lockdown would have been fully or partially adjusted to a new normal in terms of the operating environment, at least in the short to medium term.
Three key issues would be sticking out in the days ahead which determine how far Nigeria can sustain a semblance of stability or sanity, viz, Grappling with the epidemiology of the Coronavirus (COVID-19) underpinned by the peaking and flattening of the curve within the shortest timeframe; Sustained peace and order in the socio-economic space, and; stability in the macroeconomic, fiscal and monetary environment.
The Nigerian Centre for Diseases Control, NCDC, in conjunction with a presidential task force, has been shepherding the efforts on the first issue while the Central Bank of Nigeria, CBN, has been in the vanguard of efforts to address the other two issues.
The concept of Coronanomics is a reference to the new economic and commercial order brought about by the COVID-19, which is the focus of this report.
Financial Vanguard review of the events in the past seven weeks indicates that while almost all analysts have posited a general downturn with likelihood of a recession in the short to medium term, the mainstay of public policy response has been to reign in on job losses, inflationary uptick and generally sustain productivity and GDP-footings.
By middle of the first quarter, 2020 the economic impact of the global COVID-19 pandemic had already hit Nigerian shores ahead of the first index case on February 27, 2020, with crude oil trading far below the 2020 budget price benchmark. By this Nigeria’s fiscal plan 2020, and to a large extent the Medium Term Expenditure Framework, have been battered.
By mid-March the pandemic had put pressures on Nigeria’s economic and financial policymakers and supervisory institutions, sparking off a number of mitigating initiatives by government agencies to combat the expected negative social-economic impacts on households and businesses.
Consequently, on March 16 2020, the CBN released its stimulus package with a circular on its policy response to the outbreak to reflate the economy and support businesses.
These measures include extension of one year moratorium on principal repayments for its intervention loan facilities effective March 1, 2020; Reduction of interest rate on all CBN intervention facilities from 9 to 5 percent effective March 1, 2020; Creation of a N50billion targeted credit facility for households and small and medium-sized enterprises (SMEs) that have been particularly hard hit by COVID-19; Creation of a credit support for healthcare industry; Regulatory forbearance; and the strengthening of CBN Loan Deposit Ratio (LDR).
Also included in the stimulus regime are the galvanisation of the corporate Nigeria into the anti-COVID war group led by the CBN known as the Coalition Against Covid (CACOVID) which has raised about N27 billion so far to cushion government’s burden in funding the facilities for containment of the virus; commitment of N1.1 trillion into critical sectors; and commencement of a three month repayment moratorium for all TraderMoni, MarketMoni and FarmerMoni loans.
One of the most important and immediate quick win in the CBN’s initiative has been the galvanization of the financial institutions into the stimulus regime.
Banks and other financial institutions in Nigeria are now responding with different initiatives to support their customers during this challenging time. Some of these initiatives include loan payment holidays, special waivers on payment of fees on credit cards, increasing credit card limits, short term support facilities and a waiver of charges on a specified number of transactions on digital platforms.
The CBN measures have also stabilized the banking system while positioning the banks to withstand the pressures that could have come from the downstream effect of the pandemic on the economy. Thus, a modification of financial instruments has come into play with the contractual terms or cash flows now amended to fit the circumstance.
Forbearance of a financial asset
As encouraged by the CBN circular, all lenders are encouraged to grant forbearance to households and businesses that are most affected by the pandemic by either reducing interest rates, delaying the payment of principal or amending covenants to allow the borrower sufficient capacity to service their obligations.
Evaluating the implication of the forbearance on the banks’ profit and loss account, analysts at KPMG stated: “As lenders grant forbearances or implement CBN Covid 19 Pandemic measures, they will need to evaluate the relevant facts and circumstances especially to determine whether the direct impact of such measures increases or reduces credit risks”.
They, however, provided a guide to assessing the impact of the forbearance on the asset quality of banks thus: “The significant increase in credit risk (SICR) assessment considers changes in the risk of default occurring over the life of the instrument. COVID-19 generally represents a credit deterioration affecting many borrowers. A key issue will be to distinguish between cases where:
• the moratorium/forbearance provides relief from shortterm liquidity constraints impacting the borrower that do not amount to a significant increase in credit risk (SICR) considering the entire life of the instrument; and
• there is a significant increase in the risk of default over the entire remaining life of the instrument.”
They also added that the above distinction could be difficult to make and therefore lenders should evaluate the macroeconomic impact on a holistic basis i.e how severe and long the macroeconomic problems will be, when and how quickly there may be a return to longer-term “normal” economic trends.
But as the International Accounting Standards Board (IASB) has stated in the context of COVID-19, the extension of payment holidays to all borrowers in particular classes of financial instruments should not automatically result in the asset being considered to have suffered a significant increase in credit risk. Moreover, CBN may have taken into consideration and as contained in the IASB document on IFRS 9 and COVID-19, that a number of assumptions underlying the way Expected Credit Losses (ECL) requirements of IFRS 9 are implemented may no longer hold because of the pandemic. But it is likely to be difficult at this time to incorporate the specific effects of COVID-19 and government support measures on a reasonable and supportable basis.
Some economists are now looking at the post-COVID Nigerian economy which is what the CBN stimulus regime is meant to address.
Reflecting on the measures so far, Nigeria’s leading economists, Dr. Ayo Teriba, stated: “Nigeria must push policies that could brighten the post-pandemic outlook. Unfolding global realities now give Nigeria a chance to leverage its vast public assets to raise external liquidity thresholds enough to switch from contraction to expansion by adopting securitization privatization, liberalization, commercialization policies.”
Moreover, Teriba is of the view that despite negative external income shock, Nigeria remains asset rich domestically. Nigeria’s history of oil booms, according to him, combines favourably with her large population, over half of which are spread in hundreds of urban centres, to bequeath her with huge stocks of valuable public assets.
He stated further: “It is time to broaden the conversation to include the differences that the value buried in vast assets owned by Nigeria could bring to the narratives, evaluate the case for unlocking domestic and external liquidity from them, and explore ways of doing so.
“Doing these will change Nigeria’s economic, fiscal and financial narratives by unlocking liquidity needed to strengthen Naira, rejuvenate fiscal, financial, and foreign exchange streams, break dependence on volatile oil revenue and costly deficits, rebuild infrastructure, diversify and accelerate growth, eradicate poverty and unemployment, and lay foundations for shared prosperity. In general terms, we must ensure that our policies are well-aligned with unfolding global realities by repositioning to get a good share of the post-pandemic financial green shoots: we must push for large FDI/Remittances inflows as our main sources of external liquidity, and deploying those into transport and energy infrastructure to boost stability, growth, and trade.”