TSA: Do Not Panic, Emefiele Tells Banks, Investors

 

Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele, thursday also ruled out further devaluation of the naira and told investors and banks not to panic about the government moving its funds to the central bank, a move that has drained about N1.2 trillion from the financial system.

In an interview with Reuters, Emefiele said he was ready to inject liquidity if needed into the interbank market, which dried up this week following a directive to government departments to move their accounts into a Treasury Single Account (TSA) at the central bank.

The TSA is a bank account or a set of linked bank accounts through which the government transacts all its receipts and payments and gets a consolidated view of its cash position at any given time.

The policy is part of President Muhammadu Buhari’s drive to fight corruption, but analysts said it could suck up as much as 10 per cent of banking sector deposits in Africa’s biggest economy - hammering banks’ liquidity ratios.

The president set a deadline of September 15 for full compliance with his directive that all revenue due to the federal government or any of its agencies must be paid into the TSA or designated accounts maintained and operated in the CBN, except otherwise expressly approved.

Amid confusion over the implementation of the policy, overnight interbank lending rates spiked to over 91 per cent this week, but Emefiele denied the policy had provoked a liquidity crisis.

“There is no shortage of liquidity,” he said, pointing to oversubscribed sale of treasury bills on Wednesday. “A spike is a momentary action. It’s sentiment,” he said.

Emefiele said less than N1 trillion ($5 billion) would be moved into the single account but did not give details.

Emefiele was also emphatic about maintaining the naira currency — which has dived in the past year due to a collapse in oil revenues — at its current level of N197 to the dollar.

“There will be no devaluation because right now the currency is appropriately priced,” he said

In a series of unconventional interventions to protect the naira, the bank has blocked access to foreign currency to import items ranging from soap and toothpicks to cement and private jets.

Emefiele said the list of restricted items could be expanded to encourage local production.

He rejected claims by Nigerian firms about the difficulties of getting hold of dollars and ruled out the possibility of a default by any company with dollar-denominated debt.

Buhari on Wednesday also opposed a weakening of the naira and endorsed the CBN policy of restricting foreign exchange trading.
“I don’t think it is healthy for us to get the naira devalued,” Buhari said in an interview in Paris with French television station, France 24.
The central bank is providing ample foreign exchange to “essential services, industries,” he said.

The overnight tenor of the Nigerian Interbank Offered Rates closed at 23.125 per cent thursday, lower by 24.50 per cent than the 47.625 per cent on Wednesday.

Despite Emefiele’s insistence that Nigerian firms were not encountering difficulties gaining access to dollars, evidence abound of companies finding it increasingly hard to get hold of foreign currency due to central bank restrictions and may struggle to repay their debts.
Yields on a number of dollar corporate bonds rose close to record highs this week, reflecting investors’ anxiety despite an assertion by Nigeria’s richest businessman, Aliko Dangote, that no borrower would default due to the currency shortage.

Since 2007, Nigerian financial and energy firms such as FBN Holdings Plc and Seven Energy have issued more than $5 billion of dollar-denominated debt on international capital markets, including almost $3 billion in Eurobonds since the start of 2014, according to Thomson Reuters data.

Companies across the board have started feeling the dollar shortage due to restrictions imposed by the central bank to halt the naira’s fall and preserve its foreign currency reserves.

The foreign currency rationing is hurting. “This is an enormous problem for the organisations… which have issued Eurobonds but also some of the more local corporates who are in the manufacturing business, trying to access dollars to get the interest payments made on time,” said Angus Downie, Head of Economic Research at regional lender Ecobank.

“If the oil price does not rise soon for some companies that have borrowed in dollars, they will struggle to make payments and the end result would be that they would have to default.”

When the US Federal Reserve finally raises its Fed funds rate – effectively the base rate underpinning borrowing costs around the world – the burden will increase yet further for Nigerian borrowers.

The Fed was expected to end the era of ultra low interest rates yesterday, hurting all the emerging market companies that loaded up with cheap debt during the past seven years.

Foreign bond and equity investors are also fretting over a policy vacuum as Buhari has yet to appoint a cabinet or economic team more than three months after he took office. They are ever more reluctant to put money into Nigeria.

In another sign of investor frustration, JPMorgan said last week it would remove Nigeria from its influential Emerging Markets Bond Index (GBI-EM) due to a lack of liquidity and the currency restrictions – a move that might prompt more capital outflows and increase costs to borrow abroad.

Yet Dangote, Nigeria’s most prominent businessman and Africa’s richest man, who produces anything from spaghetti to cement, disagrees.

He told Reuters that those “looking for dollars to pay interest will get it from the central bank”.

“I have not seen anybody who has defaulted on the paying of interest. It won’t happen,” said Dangote, giving his backing to central bank restrictions that have been unpopular with those who have struggled to secure dollars needed to import goods.

Yields for corporate dollar-denominated issues reflect the rising premium investors demand to hold Nigerian debt.

Access Bank’s seven-year Eurobond issued in June 2014 yielded 14.8 per cent on Wednesday, hovering just below a five-month-spike hit earlier in September. Fidelity’s four-year Eurobond changed hands with a yield of 14.879, just off a record high hit on Tuesday.

The only international debt issue this year was made in April by Lagos-based development financier Africa Finance Corporation (AFC).
The squeeze on the financial sector is also worrying policymakers. Minutes from the last meeting of the central bank’s monetary policy committee showed that one member, Dr. Adedoyin Salami, voiced concerns about a “disconcerting rise” in the number of non-performing loans in the banking sector.

“So far the central bank has in principle enough ammunition to deal with this risk,” said Samir Gadio, Standard Chartered Bank’s Head of Africa Strategy, adding that the difficulties were probably more with loans and dividend payments abroad than with Eurobonds.

Bismarck Rewane, chief executive of Lagos-based consultancy Financial Derivatives Company (FDC), said Nigerian banks and firms were still able to keep up with interest payments and he expected the central bank would probably relax the rules at some point.

But the dollar shortage will hit businesses, as they need to take on more loans at local banks in order to spend more on imports.

“Some companies are going to die,” Rewane acknowledged. “Typically, there will be around five or 10 per cent of companies that will be in jeopardy.”