Lending at $47 a barrel
At first glance, Nigeria’s decision last month to float its currency and the announcement this week of a bank merger in the United Arab Emirates (UAE) have little in common. Nigeria is a country of almost 180m people with a GDP per person of less than $ 3,000 (at last year’s market exchange rates). The population of the UAE is 18 times smaller and 13 times better off. Both countries are, however, members of the Organisation of the Petroleum Exporting Countries (OPEC), a cartel, and both are learning to cope with cheaper crude.
The merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB), approved by their boards on July 3rd, will create a national champion with assets of over 640 billion dirhams ($ 175 billion). FGB’s strengths lie in consumer banking, credit cards and housing loans. NBAD describes itself as a “banker to the government”, with a strong investment-banking arm. The merged institution will help Abu Dhabi “project its financial power” beyond its borders, says Simon Kitchen of EFG-Hermes, an investment bank.
It is also, true, however, that the UAE itself has become less financially roomy. Since the oil price began sliding, in 2014, oil revenue has declined, stemming dollar inflows. Because the dirham is pegged to the greenback, lower inflows, all other things being equal, translate directly into slower growth in the money supply. In fact, it has plateaued over the past two years (see chart). A similar slowdown has prevailed across the Gulf. No fewer than 46 commercial banks (one for every 208,000 people) are competing over the UAE’s stagnant pool of deposits. Some of the smaller ones now trade at less than their book value. James Burdett, NBAD’s chief financial officer, has said that further consolidation “makes a lot of economic sense.”
Whatever the consequences of the peg, the UAE has the fiscal and currency reserves to defend it. It allowed its budget deficit to reach 3.7% of GDP in 2015, according to the Economist Intelligence Unit, our sister firm, but that red ink followed an even bigger surplus the year before. For less fortunate countries, cheaper oil poses tougher choices. One way to supply more money locally despite a dearth of dollars is to let the exchange rate drop. On June 20th Nigeria did just that, allowing the naira to depreciate by 30% in a single day. This float replaced an unworkable peg, imposed in March 2015, that had left the economy short of dollars and captive to an expensive black market for foreign exchange. In the week after the float was announced, bank shares rose by almost 10%.
Whereas the UAE is chock-full of banks, Nigeria has remarkably few. Only 21 (one for every 8.5m people) soldier on, down from 89 in 2004. For this score of survivors, the naira’s depreciation posed some difficulties. According to Fitch Ratings, 45% of Nigerian banks’ loans are denominated in dollars (or other foreign currencies), whereas their capital is in naira. When the currency fell, it dragged down the value of their capital relative to their loans, bringing them closer to regulatory minimums. If the naira weakens much further, it may harm their creditworthiness.
In other oil-exporting countries, a drop in the currency has caught banks in the opposite trap, raising the value of their liabilities relative to their assets. In both Azerbaijan and Kazakhstan, for example, deposits are more dollarised than loans, exposing banks to a troublesome currency mismatch. Every oil exporter is unhappy, each in its own way.