Moody’s: Dollar Scarcity Remains Key Challenge for Firms in Nigeria

•  Says national growth prospects attractive
• External reserves record marginal increase

Obinna Chima

While subdued United States dollar supply in the context of prolonged lower oil prices remains a key challenge for corporate bodies in Nigeria, especially those companies constrained by foreign exchange (FX) restrictions on certain imports, growth prospects for the country over the next three years are attractive, Moody’s Investors Service said in a report yesterday.

The report titled: ‘Corporates Nigeria: US Dollar Scarcity Remains Key Challenge to Improvement in the Corporate Sector,’ was posted on the global rating agency’s website.

This is just as the data on the Central Bank of Nigeria’s (CBN) website showed that the country’s external reserves recorded an increase of $216 million in two weeks, from the $23.948 billion it was on November 1, to $24.164 billion as at November14, 2016.

In an effort to meet part of the pent up demand for FX, the CBN recently ramped up supply to critical sectors of the economy by allocating the greenback to banks for onward sale to their customers through Special Secondary Market Intervention Retail Sales (SMIS). The interventions which commenced last month were done through 60-day forwards sale and was aimed specifically at meeting the FX payment of mature obligations for the importation of agriculture and industrial raw materials, machineries and equipment as well as spare parts and ticket sale remittances for airlines.

Nevertheless, Moody’s Vice-President and local market analyst for the Government of Nigeria, Aurélien Mali, in the report yesterday noted: “Nigeria is still undergoing a severe economic realignment to adjust to lower oil prices and the knock-on effect on its US dollar oil exports, which have led to reduced US dollar supply and lower GDP growth,”

Also, Moody’s Assistant Vice-President and the report’s co-author, Douglas Rowlings, noted: “The naira’s depreciation by nearly 60 per cent in June partially cleared accumulated US dollar demand and stabilised foreign currency reserves. However, access to US dollars through official channels remains challenging for some companies.”

Moody’s analysts held the view that foreign capital inflows into Nigeria were unlikely to rebound strongly as the existence of a “parallel market acts as a deterrent,” saying investors are hesitant to invest capital into Nigeria as long as there is uncertainty around the propensity for a further devaluation of the naira versus the US dollar.

To this end, Moody’s expects foreign investment inflows to continue “to be constrained until the parallel market naira per US dollar exchange rate moves closer to the official exchange rate”.

It noted that the supply of US dollars in Nigeria would improve over time as real growth rates pick up, which was expected to be supported by investment by multinational corporates wishing to further strengthen their domestic position in Nigeria or establish a presence in the country. This, in turn, should be underpinned by improving Gross Domestic Product (GDP) growth.

“The foreign exchange limitation continues to pose challenges for corporates’ day-to-day operations, capital expenditure (capex) and financing activities. Corporates servicing US dollar debt commitments will continue to have priority access to US dollars but will need to issue requests at least three months in advance to be assured of requisite availability, while corporates requiring US dollars for their purposes, such as capex outside Nigeria, will continue to face difficulties in obtaining sufficient US dollars.

“Another source of US dollars through a rebound in oil production could support the reserves in the future, but it is hypothetical at this stage. If such development were to occur at the current exchange rate, it could balance supply and demand for US dollars in Nigeria.

“This, in turn, would lead to the eclipsing of the parallel market, which would encourage net portfolio inflows and should ensure that the official US dollar supply meets the total demand from Nigeria’s economy,” it added.

Looking ahead, Moody’s foresaw that growth prospects for Nigeria remains attractive for corporates over the next three years.

“Although Moody’s expects Nigerian consumers’ purchasing power to remain under pressure over the next 18 months, both domestic and foreign investment is expected to take advantage of Nigeria’s compelling economic fundamentals and are likely to rebound once the economy has fully stabilised.

“Nigeria remains the largest economy in sub-Saharan Africa on a purchasing power parity basis, offering a sizeable market for corporates. A growing middle class – both in percentage and absolute terms – and increasing consumer wealth levels will continue to support higher levels of discretionary income expenditure,” it added.

Meanwhile, the naira depreciated to N465 to the dollar on the parallel market yesterday, lower than the N455 to the dollar it was the previous day. But on the interbank FX market, the spot rate of the naira closed at N305.50 to the dollar yesterday.