The Governor of the Central Bank of Nigeria (CBN) held a press briefing on 16 March. Six policy measures were announced to address the economic impact of the Covid-19 pandemic:
- A 1-year extension of the moratorium on principal payments on certain intervention loans.
- Reduction of interest rates on CBN intervention facilities to 5% from 9% for one year.
- Creation of a NGN50bn credit facility for households and SMEs. The CBN mentions hoteliers, airline service providers and health care merchants, but states that this facility will not be limited to these industries.
- Intervention facilities for the healthcare industry, including loans for drug production and for building healthcare facilities.
- ‘Temporary and time-limited’ restructuring of business and household loans by banks, particularly loans to oil and gas, manufacturing and agriculture companies.
- Continued focus on the loans-to-deposit ratio policy, which the CBN states has been successful at growing credit. The CBN will ‘further support’ bank funding and will consider ‘additional incentives’ for banks to extend longer-tenured facilities.
The regulator also emphasised its readiness to ‘provide liquidity backstops’ to banks. The CBN has not changed benchmark rates, and has not made further comments about the exchange rate (after the 12 March press release).
The impact of the CBN’s latest statement may be that restructured loans/Stage 2 loans rise, rather than non-performing loans (NPLs). However, as we have seen previously (in Nigeria and other countries), it is likely that the market will focus on the total of Stage 2 and Stage 3 loans, not just the reported NPL figure. The CBN is also reducing the interest rate on certain loans, as highlighted earlier. This may impact interest income at some lenders at a time when other revenue streams are already under pressure. We note that the reduction only applies for one year.
Turning back to asset quality, in our recent report, we ran a stress test for the four Nigerian banks with eurobonds outstanding. We assessed four scenarios – impaired loans doubling, and the percentage of impaired loans rising to 10%, 20% and 30% of gross loans. We assume that banks maintain a minimum equity/assets ratio of 8%. The test shows that all four banks could keep coverage ratios above 100% even if impaired loan ratios rise to 10%. For more details on this asset quality stress test, and our view on the potential impact of Covid-19 and lower oil prices on Nigerian banks, see the report here.
Read the full report here.
Recap of the week’s key credit developments
Central banks around the world continued monetary easing this week to support economic activity amid the effects of the coronavirus pandemic, including the US Federal Reserve, which lowered the Fed Funds Rate again by 100bps to 0-0.25% on Sunday, taking total rate cuts to 150bps this month. The US Fed and the ECB last night also announced major bond purchasing programmes (QE), amounting to US$700mn and EUR750mn, respectively. And, following a special meeting, the UK’s Bank of England announced today another rate cut, from 0.25% to 1%, and to increase in its holdings of UK government and corporate bonds by GBP200bn to GBP645bn, after it noted that conditions in the gilt market had deteriorated, and UK and global financial conditions had tightened. The move follows its previous cut and support measures announced on 11 March.
Interest rate decisions in our universe and wider EM this week include:
- Sri Lanka (SRILAN): On Monday, Sri Lanka’s central bank (CBSL) held an emergency meeting and cut the benchmark standing deposit facility rate by 25bps to 7.25%. It follows a scheduled meeting on 5 March when the rate was held unchanged, and a 50bps cut in January. Economic growth has recently been below potential, according to the CBSL statement, but has showed signs of improvement due to monetary and fiscal stimulus and rising business confidence following the presidential election in November. The stimulus comes as inflation is above the target band of 4-6%, at 6.2% yoy in February.
- Egypt (EGYPT): The Egyptian central bank cut its main policy rates by 300bps on Monday, reducing its overnight lending rate to 10.25% and its overnight deposit rate to 9.25%. It was signalled as a pre-emptive move to support the economy in response to the coronavirus pandemic. The central bank noted the inflation outlook remained consistent with its 9% +/- 300bps inflation target by Q4 20.
- Bahrain (BHRAIN): Also on Monday, the Central Bank of Bahrain cut its key interest rates by 75bps, following the US’s lead given its exchange rate peg to the US dollar. The overnight, one-week and one-month deposit rates are now 0.75%, 1% and 1.45%, respectively.
- Chile (CHILE): The Central Bank of Chile said in a statement that it had made a unanimous decision to cut its policy rate by 75bps to 1% on Monday. This was due to a rapid deterioration of the economy caused by the coronavirus and the resulting global financial consequences and inflation uncertainty, while the peso has also declined by c13% versus the US dollar so far this year. This is the lowest the monetary policy rate has been lowered to since June 2010.
- Armenia (ARMEN): In a meeting on Tuesday, the Central Bank of Armenia’s Board decided to cut the refinancing rate by 25bps to 5.25%, as the coronavirus impacts growth in Armenia’s partner countries. A deflationary effect on the Armenian economy is now expected, according to the Bank’s statement. Effects on the Armenian economy are expected to be contracting aggregate demand and supply, with notable impact in the services sector. Forecasts suggest that economic growth will slow in the short run, but that long run potential is unaffected.
- Pakistan (PKSTAN): At a meeting on Tuesday, the MPC of the State Bank of Pakistan decided to cut the policy rate by 75bps to 12.5%. The MPC cited an improved inflation outlook, as the rise in domestic food prices slowed, consumer price expectations declined, global oil prices have sharply fallen recently and domestic and external demand has fallen in response to the coronavirus pandemic. Average headline inflation is expected to remain consistent with the State Bank’s FY 20 expectations of 11-12%, before falling to the medium-term target of 5-7% earlier than previously forecast, according to the MPC statement. The SBP also hopes to support investment through refinancing for bank lending for plant and machinery for new projects.
- Brazil (BRAZIL): Brazil’s Central Bank lowered its Selic rate on Wednesday by 50bps to 3.75% in a unanimous decision by its Copom committee. Despite this and other stimulus measures, including bond repurchases, the currency, stocks and bonds have all declined.
- Indonesia (INDON): Bank Indonesia has cut its 7-day reverse repurchase rate by 25bps for the second consecutive month to 4.5% on Thursday, as predicted by 14 of 26 economists surveyed by Bloomberg. The coronavirus pandemic is expected to weaken the economy: Bank Indonesia growth forecasts for 2020 are now 4.2-4.6% from 5-5.4% previously. Authorities also indicated that there was room for further cuts.
- Philippines (PHILIP): The Central Bank chose to lower its key policy rate on Thursday by 50bps to 3.25%, following a 25bps cut in February. In addition to the latest cut, the Bank also announced technical adjustments to ease temporary liquidity problems for financial institutions. Further cuts to support the economy seem likely.
These monetary decisions follow actions last week, including Ukraine’s 100bps cut in its discount rate to 10%. Kazakhstan’s central bank, on the other hand, has been one of a few, if not the only one, to raise rates, increasing its base rate by 275bps to 12% at an emergency meeting last week to protect the currency following the oil price fall.
Nigeria (NGERIA): In a statement on Wednesday, the Central Bank of Nigeria (CBN) announced it will increase its support to manufacturing and other sectors, including towards import substitution, to NGN1tn (US$2.7bn). It announced it will also provide a 100bn naira loan to health authorities, to help control the spread of the coronavirus. This follows previous stimulus efforts, as the country faces lower oil prices. Recent official figures show that oil contributed 8.78% to GDP in Q4 19. The economy and government revenues remain exposed to oil price risk. On Monday, the regulator approved a one-year moratorium on all principal debt repayments from 1 March and lowered the interest rate on central bank intervention loans directly for agriculture and commerce from 9% to 5%. Despite the stimulus measures, there are fears that the economy could fall into recession this year. The government also announced a NGN1.5tn (c10%) cut in the budget this year, anticipating a 40-45% fall in government revenue.
Ghana (GHANA): Also due to the coronavirus pandemic, the Ghanaian President announced the country will seek US$100mn in support from the IMF and World Bank, according to local media reports. After its previous IMF programme ended in April 2019, the pandemic has now led the authorities to seek financing from the IMF and World Bank, and other multilaterals, in order to close an expected financing gap that will emerge from lower oil prices and lower non-oil revenues. This includes tapping a US$12bn World Bank coronavirus facility and US$10bn IMF Rapid Credit Facility (however, we observe that as the latter facility from the IMF is only available to low income countries, emergency financing through the Fund’s RFI may be more appropriate). The IMF announced on 4 March that it will make available US$50bn through its existing rapid-disbursing emergency facilities, with US$40bn available to emerging markets through the Rapid Financing Instrument (RFI) and US$10bn at zero interest for the poorest members through the Rapid Credit Facility (RCF). Iran may have been the first country to have sought financing from the IMF’s emergency facilities, after reports that it had formally requested US$5bn from the emergency fund on 6 March.
Privatbank (PRBANK): Holders of Privatbank senior bonds are one step closer to repayment. On 16 March, the London High Court determined that the senior bondholder trustee would not incur additional liabilities by making payments to some (but not all) holders of the PRBANK 10.25% and PRBANK 10.875% securities. Hearings in the London High Court took place in late February, but the presiding judge decided to withhold judgement at that time. The 16 March judgement means that based on the ‘illegality defence’ some bondholders are entitled to receive a payment of par plus accrued interest. The next step for PRBANK senior bondholders is to address the 'bail-in defence'. This defence requires that the bail-in of Privatbank bonds be recognised by the Bank of England. Like the illegality defence, this is being heard at the London Court of International Arbitration (LCIA). It is not yet clear how long it will take for a decision to be made. As we have stated before, we see developments at Privatbank as both important and significant, for holders of senior bonds in general. If no award was granted, it would effectively have meant zero recovery on senior bonds of a bank classed as systemically important, which remains a going concern. Such a ruling may have had undesirable implications for Ukrainian banks looking to access foreign bond markets in the future. Read our report here.