Naira to further depreciate in 2024 — S&P Global Ratings warns

By Sodiq Adelakun

The Naira is expected to face significant challenges in 2024. The exchange rate is predicted to further depreciate due to Nigeria’s stagnant reserves, which restrict the availability of foreign exchange (FX), according to projections by Standard and Poor’s (S&P) Global Ratings.

In their report on the Nigerian Banking Outlook for 2024, S&P highlighted that increased import expenses, outstanding FX transactions, and reduced FX earnings from oil exports would impede the growth of FX reserves. These factors collectively contribute to the difficult road ahead for the Naira.

“We forecast usable FX reserves of $28 billion in 2024,” the agency said.

It acknowledged the moves by the Central Bank of Nigeria (CBN) to clear backlogs, but these were largely inadequate as the market faced weak supply challenges, reaffirming a similar assertion by Fitch a few days ago.

The CBN has made efforts to clear approximately $2 billion out of a $7 billion backlog of FX transactions, while President Bola Tinubu was able to get Saudi Arabia to pledge FX support.

However, S&P said the Nigerian currency would continue to depreciate because of structural supply constraints, while the country’s import cost would rise higher than current oil exports due to the rates.

Nigeria gets 80 percent of its foreign exchange from oil, but production has been hit due to the triple whammy of theft, structure vandalism, and underinvestment.

“We expect the current account to record a small surplus averaging below 1 per cent through 2025 as the import bill increases faster than oil exports due to high prices.

“While the Naira trades closer to a managed float rather than being a fully free-floating currency, the exchange rate is now significantly more in line with market demand and weak supply fundamentals,” S&P said.

The exchange rate fell below N1,200/$1 in December 2023, recovering to about N850/$1 thereafter but now the rates are trading at N900 per Dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM) and selling for as high as N1,300 at other unregulated market segments.

The firm also currency depreciation and inflation will put pressure on asset quality as credit losses for the sector rose 3.5 percent in 2023 due to currency depreciation, high-interest rates, and inflation, adding that while the sector’s NPL ratio will moderate in 2024, it will hover below the 5.0 percent regulatory limit due to the currency effect on gross loans.

It noted that the CBN would likely hike interest rates from the current 18.75 per cent.

“Credit cycles are inherently correlated to oil prices and currency depreciation. Further rate hikes are possible due to the gap between inflation and the CBN’s benchmark rate. This will put pressure on borrowers as banks pass the full rate increase on to them.

“Credit risks also stem from energy transition risks, because loans to the hydrocarbon sector still represent a sizable share of the banking sector’s loans, at about 30 per cent of total loans. The banking system’s dollarization will increase following the naira depreciation in June 2023. We estimate that FX loans will reach 55 per cent of total loans,” it stated.