Daily Management Review

Oil exporters and their struggle with crisis


07/26/2016


At first glance, decision of Nigeria to move to a floating exchange rate last month, and announcement of a merger of two UAE banks have little in common.



Nigeria is a country with a population of almost 180 million. Its GDP per capita is less than $ 3 thousand at market exchange rates of the previous year. UAE's population is 18 times smaller and 13 times richer. However, both countries are OPEC members of the Organization of Petroleum Exporting Countries, and both now are learning to live with cheap oil.

Merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) will create the largest in the UAE financial institution with total assets of 640 billion dirhams ($ 175 billion). FGB has a strong position in retail banking, dealing with credit cards and mortgages. NBAD has positioned itself as the "government's banker" and boasts with a powerful investment division.

The merged bank will help Abu Dhabi "to extend his financial influence" outside the country, says Simon Kitchen, an analyst of EFG-Hermes investment bank. 

UAE nowadays has much less room for fiscal maneuver. Since oil prices started to decline in 2014, oil revenues, and hence the dollar revenue, also fell. The dirham is pegged to the dollar, and lower inflow of hard currency has led to a slowdown in money supply growth. In fact, it was zero in the last two years, says The Economist.

A similar slowdown is observed around the Persian Gulf. At least 46 commercial banks (one per every 208 thousand people) are fighting for the stagnant pool of UAE deposits. Some of smaller financial institutions are trading below their book value of assets. 

So far, UAE still retains fiscal and monetary capacity to keep binding, but these efforts have already led to an increase in the budget deficit to 3.7% of GDP in 2015. To compare, there was a surplus a year earlier.

Cheaper oil leaves even less room to maneuver for the less wealthy countries. Decline of exchange rate is one of the possible ways to increase money supply in the country, despite the shortage of dollars. This is what Nigeria has done on June 20, when the naira was depreciated by 30% in one day.

The floating rate replaced binding to the dollar. This measure, introduced in March 2015, deprived the economy of money and led to emergence of a black foreign exchange market. During the week after introduction of the floating rate, shares of banks soared by almost 10%.

Number of banks in Nigeria is catastrophically small. Today, there are just 21 of them (one per 8.5 million people), while there were 89 organizations back in 2004. Apparently, devaluation of the naira has created certain difficulties for these financial institutions.

According to Fitch Ratings, 45% of Nigerian banks loans are denominated in dollars or other foreign currency. When the local currency was devalued, it brought capital and loans to the border of the regulatory minimum. If naira weakens further, it may hurt their solvency.

source: economist.com






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