A Week in Nigeria: 1 August

Highlights from Reuters coverage of Nigeria over the last seven days

In this week’s round-up: dollar shortage spells misery for businesses and banking sector, Nigerian head of African Development Bank cleared of wrongdoing and NNPC signs $1.5 billion prepayment deal.

• We reported on the impact of Nigeria’s severe dollar shortages on the country’s banks and businesses – primarily manufacturers. Nigeria’s banks are expected to take a big hit to revenues and face rising borrowing costs this year as central bank measures to support the naira currency squeeze lenders already hit by fallout from coronavirus and the oil price shock, analysts say. Banks in Africa’s largest economy – a mainstay for equity and fixed income frontier market investors – have learned to navigate challenges in a country that has long struggled with dollar shortages and multiple exchange rates. But the prospect of anemic growth, dwindling oil revenues, declining remittances and dollar shortages exacerbated by the central bank’s latest action aimed at curbing naira liquidity and currency speculation are putting pressure on lending by banks and the quality of existing assets. The central bank has sucked as much as 900 billion naira out of the local banking system since raising the cash reserve ratio (CRR) by 5% to 27.5% in January, according to analysts’ calculations. “General sentiment in the markets is that CRR debits are carried out quite close to FX auctions to prevent the banks from presenting large ticket FX demands at auctions,” said Nkemdilim Nwadialor at Tellimer Capital. Those debits also hamper wider lending, going against central bank measures of lowering banks’ loan to deposit ratios, she said. Central bank data showed credit to the private sector in April dropped by nearly two-thirds from end-2019. “Banks are dealing with slow growth, fall in lending, a lack of forex in the market and asset quality issues,” said Mahin Dissanayake, senior director EMEA bank ratings at Fitch. He expects banks’ revenues to drop at least 20% this year, though he did not expect any to make a loss. Moody’s warned in a note that dollar shortages would intensify over the next 12–18 months – a period when 49% of banks’ $7 billion foreign-currency borrowing matures, leaving them vulnerable.

Many businesses are sourcing dollars at the black market, where the naira trades at around 20% below the official rate

• We also reported on the impact on businesses of the central bank’s policy of hanging on to its dollars to support the naira. The approach is leaving a dwindling supply of hard currency to buy the imports that form the bedrock of Africa’s largest economy. Muda Yusuf, director general of the Lagos Chamber of Commerce, said that, like Odunaiya, the dollar shortage is hitting most of its 2,000 members hard. “If the situation persists it will lead to lay-offs,” he said. “If you are not producing, there will be a shortage of goods in the market, prices will go up.” Inflation has risen for 10 straight months, hitting a two-year high of 12.56% in June, piling on greater economic hardship for a population of whom 40% already live below the official poverty line of 137,430 naira ($382) per year. Added to that, there have been two devaluations of the naira’s official rate this year. With the oil market depressed by a producer price war and the pandemic-induced global recession, central bank reserves have fallen 20% in the past year to $36.1 billion, around five months of import cover. The bank initially sought to stem the decline by suspending dollar auctions in March and continues to severely ration their supply. “It’s been excruciating,” said Fred Ameobi, executive director of Coscharis Group, a conglomerate whose businesses include automobile assembly. The government says the economy could shrink by up to 8.9% in 2020, while many of the local banks that Nigerian companies rely on have seen their dollar credit lines halted by international lenders who fear they won’t be paid back. Many firms have resorted to the black market, where the naira trades at around 20% below the official rate, making dollar purchases even more expensive. We spoke to a company that makes nappies and sanitary towels, among other products. Around 80% of the materials that go into the Lagos-based company’s products are imported. To buy them, requires dollars which are increasingly hard to find.

• An independent review found that the African Development Bank rightly cleared its president, Akinwumi Adesina, of abuse of office, paving the way for him to seek a second term. Whistleblowers in January accused Adesina, who has held the AfDB’s top job since 2015, of abuses of office including favouritism in hiring fellow Nigerians, and giving out overly generous severance packages. He had denied the accusations. Adesina, one of the most prominent Nigerians on the international stage, served as agriculture minister under President Muhammadu Buhari’s predecessor Goodluck Jonathan. President Buhari has been vocal in his suppor for Adesina. The panel, led by former Irish President Mary Robinson, agreed with the decision of the bank’s ethics committee, according to its final report, seen by Reuters. The allegations against Adesina “were properly considered and dismissed by the Committee,” it said. The AfDB declined immediate comment. The U.S. Treasury could not be reached for comment. The United States pushed for the original decision to be reviewed over reservations about the integrity of the bank’s process. This put it at odds with the lender’s largest shareholder, Nigeria, which had voiced support for Adesina. The exoneration of Adesina frees him to seek re-election as the head of the multilateral lender. His first term ends on Aug. 31 and he is expected to run unopposed. The bank faces challenging economic problems caused by the coronavirus pandemic. The Abidjan-based bank forecasts a 3.4% contraction in Africa’s economy in 2020 compared with a pre-pandemic projection of 3.9% growth. A report by the bank’s ethics board in April cleared him of malfeasance but the United States, AfDB’s second-largest shareholder, rejected the internal investigation and demanded an independent panel review the case.
• Nigeria will allow schools to reopen for pupils due to take graduation exams, reviving a plan dropped earlier this month due to rising cases of COVID-19. The country has reported more than 40,000 coronavirus infections including nearly 900 deaths, and the number of deaths has jumped from 460 since the schools plan was postponed on July 9. But in the last few weeks domestic flights have resumed and a ban on interstate travel was lifted as authorities relax restrictions to open up the economy. “The federal government orders the re-opening schools for secondary school students in exit classes on August 4, 2020,” Bashir Ahmad, a presidential aide, tweeted. In the message, he said the move was made ahead of the start of the West African Examinations (WAEC) – a region-wide test for graduation from secondary school – on Aug. 17. A ministry of education statement included in the tweet said students would have two weeks to prepare for the exams. It said the decision was taken to reopen for students in “exit classes” following a meeting between the ministry, education officials from all 36 states and the Nigerian Union of Teachers.Pupils aged 14 and above typically sit the exams in Nigeria. “On schools & #COVID19: there are no easy decisions,” said Chikwe Ihekweazu, director general of the Nigeria Centre for Disease Control, in a tweet that linked to the ministry of education statement.
• We exclusively reported that Nigeria’s state oil firm NNPC has signed a $1.5 billion prepayment deal led by Standard Chartered and backed by oil traders Vitol Group and Matrix Energy, according to two sources close to the matter, the first such agreement since the coronavirus pandemic. The deal provides OPEC-member Nigeria with much-needed cash after its finances were hit by the oil price crash in April as COVID-19 lockdowns erased nearly one third of global oil demand. The financing package called Project Eagle was also backed by African Export Import Bank (Afrexim) and United Bank for Africa. Vitol and Matrix will each get 15,000 barrels per day (bpd) of crude as repayment over five years, starting in August. Nigeria’s crude production is nearly 2 million bpd. Nigerian trader Matrix confirmed its participation in the deal. Vitol, the world’s biggest independent oil trader, declined to comment. A spokesman for Standard Chartered declined to comment. Afrexim did not have an immediate comment. UBA and NNPC did not immediately respond to requests for comment. Prepayments with traders are widely used in commodity finance as banks consider them to be one of the more secure forms of lending in countries viewed as risky. For trading firms such as Vitol, these loans are ideal for securing long-term supplies and boosting razor-thin margins. NNPC has been trying to raise cash through prepayments with traders for years. However, the firm’s opaque finances and costly gasoline subsidies have made it tough for it to secure private financing on attractive terms. Nigeria announced the end of subsidies earlier this year. NNPC will use a large portion of the money to pay taxes owed by its subsidiary NPDC, the sources said. The remainder will go towards operational expenses and capital expenditure. One of the sources said money from the pre-payment could fund an upgrade of the Port Harcourt refinery.
• Still on oil, Shell said its second-quarter writedowns include the OPL 245 licence for an offshore oilfield in Nigeria which it holds alongside Eni and which is at the centre of an ongoing corruption court case in Italy. Italian prosecutors have asked for oil majors Eni and Shell to be fined and some of their present and former executives, including Eni CEO Claudio Descalzi, to be jailed in a long-running trial over alleged corruption in Nigeria. All the defendants have denied any wrongdoing. Shell said a post-tax impairment charge of $4.658 billion was “mainly related to unconventional assets in North America, assets offshore in Brazil and Europe, a project in Nigeria (OPL245), and an asset in the U.S. Gulf of Mexico.”
• Nigeria’s biggest listed company Dangote Cement is considering an open tender for a share buyback to return cash to shareholders and is deciding on the size of the programme, its chief executive said. Michel Puchercos told an analysts’ call the cement company could also conduct a market price buyback as part of options. He did not say how the buyback will be funded but added that the programme was dependent on liquidity. Dangote Cement, majority-owned by Africa’s richest man Aliko Dangote, said in March it planned to commence a share buyback programme this year once it had obtained regulatory approval. Pucheros said the upper limit of the buyback volume was 10% of its 17.04 billion registered shares and the company could offer a 5% premium to the existing price in a market price buyback, he said. Shares in Dangote Cement, which hit a peak in January are recovering from a 16-week low it touched during a lockdown imposed in April to curb the spread of the novel coronavirus. The company said the lockdown affected its April numbers which had seen some recovery in May and June as restrictions eased. Dangote Cement said it planned to focus on export expansion in West and Central Africa from Nigeria. It shipped clinker to Senegal in June from Nigeria and plans to ship to Central Africa in the second half.