CBN: Forex liquidity to remain tight, bad loans to rise

Currency market liquidity in the system is set to remain challenging in the second half of 2016 due to low oil prices, which could push up credit risks for lenders, as naira weakness makes loans harder to service, the Central Bank of Nigeria (CBN) has said. ”

Although the outlook for the rest of the year appears to be challenging, the current measures put in place … are expected to minimise the impact of shocks to the domestic economy,” the apex bank said in its half-year financial stability report released yesterday.

The CBN said the move to a flexible exchange rate regime had led to a sharp fall in the naira and contributed to the decline in asset quality for the banking sector. Dollar scarcity has persisted after the 16-monthold peg of 197 naira per dollar was lifted, however, frustrating businesses, which need dollars to pay for imports.

The naira has weakened to as low as 485 per dollar on the parallel market in recent weeks, while holding firm at around N305 on the official market, supported by central bank interventions. The National Bureau of Statistics (NBS) last Wednesday said the economy was likely to shrink by 1.3 per cent in 2016, a sharp downward revision of its estimates prompted by the naira’s fall after dollar peg was dropped.

CBN Governor, Godwin Emefiele, has told depositors and investors not to panic about the state of the banking system saying he was on top of any trouble resulting from the worst crisis in the economy for decades. But the country’s 21 banks have been laying off staff, closing branches and slashing earnings forecasts as the economic crisis worsens.

The regulator said credit risk could rise into the second half due to higher loan charges and debtors’ inability to service dollar borrowing, particularly oil and gas loans. “The increasing quantum of non-performing loans posed a major concern for regulators in the review period,” the CBN said yesterday, adding that it has enhanced supervision of loans to the oil and gas sector and the currency market.

Non-performing loans (NPL) are expected to rise in the second half, after they hit 11.7 per cent in the first half, above the central bank’s 5 per cent limit, the monetary authority said.

NPLs stood at 5.3 per cent at the end of last year. Loans to the oil and gas sectors accounted for almost a third of total bank lending while consumer credit declined owing to weak demand and increased risk aversion, the regulator said.

Tumbling oil mar kets since mid-2014 have forced Nigerian lenders, which have long thrived on business loans to the energy sector and government bond investments, to adapt their business models at short notice.