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New forex policy will increase non-performing loans – Experts

By on June 18, 2016

The demand-driven foreign exchange rate policy which was unveiled by the Central Bank of Nigeria on Wednesday may affect Deposit Money Banks with large portfolio of dollar-denominated risk assets, the Head, Banking and Finance Department, Nasarawa State University, Dr. Uche Uwaleke, has said.

He said banks with this type of risk assets would experience increase in the Non-Performing Loans, which had been affecting their profitability.

He said, “The value of the naira is likely to weaken in the short run since it is going to be determined by market forces in an import dependent economy with a shallow export base.

Also, a further spike in headline inflation from the current 15.6 per cent should be expected to result from imported inflation.

“Again, the policy may hurt deposit money banks with a large portfolio of dollar-denominated risk assets as their non performing loans may shoot up affecting their bottom lines and possibly leading to further retrenchment of staff.

“On the flip side, the flexible forex policy is likely to shore up forex reserve arising from possible increase in Diaspora remittances and foreign portfolio investments.”

Also speaking, a former Managing Director, Unity Bank Plc, Mr. Muhammed Rislanudeen, said, “The policy is more likely to free floating currency.

“It will hopefully help foreign investors take positive decision and bring liquidity into the market with medium to long term effect of bringing down the rates and also dealing with imported inflation.”

Meanwhile, yields on naira-denominated bonds rose across the board at an auction on Wednesday, where about N112bn ($563m) worth of paper maturing in 2036, 2026 and 2020 was sold, the Debt Management Office said on Thursday.

The DMO said it had sold N50bn of 2036 paper at 14.98 per cent at Wednesday’s auction, compared with 13.90 per cent at the previous auction last month.

It also sold N40bn of 2026 debt at 14.40 per cent, against 13.74 per cent, and N22bn of the 2020 debt at 14.20 per cent against 13.24 per cent.

Dealers said the yields reflected a rise in inflation, which hit a six-year high of 15.58 per cent in May.

“Many investors were pushing for higher yields at the auction to reflect the higher inflation figure released recently, which was above the prevailing interest rate in the market,” Reuters quoted one trader as saying.

Investors’ bids had demanded yields ranging between 10 and 17 per cent for all the debt on offer.

Subscriptions from investors stood at N 171.87bn compared with N159.60bn at the last auction.

The Federal Government issues local bonds as part of measures to finance its budget deficit and also help to manage liquidity in the banking system.

The Federal Government said it would borrow about N900bn locally to finance part of the N2.2tn deficit foreseen in the 2016 budget.

 

[Punch]