Fitch happy with supply, flow of FC liquidity into the banking system

Fitch Ratings is impressed with  the ability of Nigerian banks’ to access foreign currency (FC), saying that the flow has  improved considerably since the Central Bank of Nigeria (CBN) introduced a foreign exchange “window” at end-April aimed at investors and exporters.

The Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism, commonly referred to as the “Investors’ and Exporters’ FX Window”, appears to be boosting FC supply and the flow of FC liquidity into the banking system, the agency stated in its latest report.

Improved access to FC means that liquidity pressures have, for now, eased for Fitch-rated banks. FC was in acute short supply through much of 2016 and early 2017, restricting imports and forcing several Nigerian banks to extend maturities on their trade finance obligations.

NAFEX provides investors and exporters with a more transparent mechanism through which they can sell FC to willing buyers. Authorized banks act as intermediaries, clearing funds supplied by portfolio investors and exporters and ensuring timely execution of settlement for buyers.

Despite its short record, volumes transacted through NAFEX are growing, Fitch said, adding that” In our opinion, NAFEX offers a more transparent alternative to accessing FC than is available through the other foreign-exchange markets in the country. Several exchange rates operate in Nigeria. The CBN was the main supplier of FC during the height of the FC liquidity crisis and it still sells FC to the market through regular auctions, with banks acting as intermediaries.”

CBN’s official exchange rate is NGN305 to the US dollar but it sets alternative official rates at its FC auctions and different rates apply for retail, wholesale, personal and small business purchasers of FC.

NAFEX introduces yet another exchange rate, which adds to the confusion, but its rates are set by market participants and this is already attracting greater volumes than other exchange mechanisms. Access to FC is essential to boost growth in the country’s highly import-dependent economy.

The agency further stated that the ability of market participants to set their own rates under NAFEX is also forcing down exchange rates on the parallel markets. This is positive for the banks as it helps to draw funds back into the banking sector. Over time, exchange rates may converge, but this will depend on a range of market and political considerations.

The CBN can intervene on NAFEX, but “we understand from our recent discussions with banks that CBN interventions have been limited. NAFEX rates have averaged about NGN380 to the US dollar recently and volumes are reaching about USD1 billion a week, according to these discussions.

“While the improved FC access is credit positive for banks, the ratings of all the Nigerian banks remain constrained by our sovereign rating of ‘B+’/Negative,” the agency stated.