TUE. 28 MARCH 2023-theGBJournal | What a difference a month makes. In late February economists were worried by nothing more than whether the global economy would grow by 2.9% or 2.7% this year; oil prices were US$83.9/bbl (Brent crude). In late March we have a significant banking crisis in the US and Europe; global growth is questionable; oil prices are US$75.0/bbl.
Does this affect Nigeria? Our answer is that the US and European banking crises are unlikely to have direct effects on the Nigerian banking system. We also think that the Federal Government of Nigeria’s bonds will be barely affected by this. There may be some indirect effects, however, if the US and European banking crises negatively affect global growth and, in turn, cause oil prices to settle below the US$75.0/bbl level which is assumed in Nigeria’s 2023 budget. Such an indirect effect would take time, several months, to materialise.
What has happened?
In early March Silicon Valley Bank (SVB) of California experienced a run on its deposits. It had suffered losses on its portfolio of long-dated US bonds which were financed with short-term deposits. It had attempted to raise fresh capital but failed to do so. Some of its depositors started removing their money and its share price fell sharply. On 10 March the Federal Deposit Insurance Company (FDIC) took over SVB; this was the largest bank failure since the global financial crisis of 2008. Another US bank, Signature Bank, soon failed and liquidity issues (i.e. withdrawal of customer deposits) affected several other US banks.
Meanwhile, in Switzerland, things were going wrong at banking giant Credit Suisse. According to the Financial Times, Credit Suisse had seen its depositors withdraw SFR111 billion (US$102 billion, or Naira 47 trillion) during the final quarter of 2022, and two weeks ago withdrawals were running at SFR10 billion per day. The Swiss National Bank gave emergency funding to Credit Suisse which was then sold at an agreed price of US$3.25bn (N1.48tn)to rival UBS just over a week ago.
Regulators and authorities tried to restore confidence with assurances that, after the crisis of 2008, banks are much better capitalised than before. But, as events this month have shown, capital has little to do with it. Banks go bust when they run out of liquidity. The trouble starts when depositors lose confidence and begin to remove their money.
How contagion works
As this month’s events has shown, bank contagion is international and can spread fast. The problems in the US clearly forced the issue in Switzerland where Credit Suisse had been experiencing problems for several years.
Large banks tend to diversify their sources of finance by borrowing in many different markets or by issuing bonds in international markets. On the other side of these transactions are other banks (as well as non-bank financial institutions and individuals) that lend to banks or buy banks’ bonds in the interests of yield and diversification.
When a bank goes bust its loans and bonds might be held by a bank in another country or another continent, and these losses need to be reported to authorities and are often made public (think of quarterly results).
So, to check whether Nigeria is likely to be affected by the current crisis we first need to ask whether it is likely that they hold bonds issued by the likes of SVB, Signature Bank and Credit Suisse.
In our experience, Nigerian banks tend not to hold such international bonds: rather, their US dollar liquidity is usually tied up in US dollar loans to Nigerian industries, often in the oil & gas sector. We rate the risk of an immediate and significant write-down in US dollar loans issued by foreign borrowers and held by Nigerian banks as low.
Nigerian banks could be exposed if their US dollar borrowings, or the US dollar bonds they issue, held by international banks (many Nigerian banks have credit lines with international banks), cannot be renewed. This issue (i.e. non-renewal of loans and bonds) could materialise if foreign lenders become overly-sensitive to emerging market risk as a result of the crisis.
On this point it is important to understand that Nigeria, as an emerging market, has fared much better than the likes of Ghana, Pakistan, Turkey and Sri Lanka recently. It is considered one of the better credits among its peers so we do not put very much weight on this risk.
This being the case, we would not expect a negative impact on the borrowing costs of the government of Nigeria itself, or at least not much.
It is true that global markets are less keen on risk than they were a month ago, but we believe that investors in Federal Government of Nigeria (FGN) Eurobonds are quite specialised and understand the risks of Nigeria as distinct from those of risky assets generally.
Now that we have mentioned Ghana, we must recall the profound restructuring of Ghanaian public sector debt at the end of 2022. We anticipate that some Nigerian banks will suffer write-downs on Ghanaian positions when they report their 2022 results, but we do not expect these to be significant in the context of large Nigerian banks which, these days, earn their group profits in many different African nations.
Is it all over?
This is not to say that the crisis in the US and Europe will be over any time soon. Banking crises have tentacles: time passes before we know where those tentacles are. Credit Suisse had a class of bonds called AT1 on which it intends to default, and the outstanding amount is some US$16.0 billion.
It is not known exactly which individuals and institutions hold them (though we will have an idea soon because some holders intend to sue). During times of crisis banks tend to review their credit guidelines, so we expect an all-round tightening of credit terms across developed markets.
This is one reason why oil prices have been falling. If the secondary effects of the banking crisis run deep then expect credit to industry, trade and property in the US and Europe to get tight, resulting in lower economic growth than currently forecast, dampening demand for oil and, unless there is concerted action by OPEC and its ally Russia (OPEC+) to cut production, leading to price falls. This is one area in which Nigeria may be exposed, though it is an effect that would take several months to show up in the nation’s finances. Credit-Coronation Research
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