Fitch’s Currency Swap Estimate Rocks Nigeria’s Reserves

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Fitch Ratings has shone a spotlight on Nigeria’s currency swaps, estimating them to be worth between $10 billion and $12 billion as of the end of 2022, raising concerns about the country’s net reserve position and external vulnerabilities.

The revelation came in a report titled ‘Nigeria’s weaker reserves highlight external risk and policy challenges,’ released in the wake of the Central Bank of Nigeria’s (CBN) recent financial statements.

Fitch’s report emphasized the significance of these swaps, constituting 30% of the country’s gross reserves, which stood at $37 billion at the close of 2022. These swaps include agreements with domestic banks as well as international counterparts, although the latter remains shrouded in uncertainty.

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The report highlighted the potential consequences of these swaps, stating, “We anticipate that most of these domestic swaps will continue to be rolled over, reflecting incentives for banks to invest the naira received in high-yielding sovereign securities and the sector’s limited reliance on swaps for foreign-currency liquidity given its sizeable foreign-currency placements with international banks.”

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The CBN’s release of consolidated financial statements, a rarity until recently, led Fitch to suggest that Nigeria’s net reserve position may be more fragile than anticipated. While it provided transparency regarding Nigeria’s reserves, it left important gaps that hinder a reliable assessment of the net reserve position.

Fitch further underscored the significance of Nigeria’s external finances, which were a key rating sensitivity, and the presence of $7.5 billion in securities lending liabilities and $6.8 billion in short-term foreign-currency forward payables in the CBN’s financial statements.

However, the real puzzle lies in the “FX forwards, OTC futures, and currency swaps” worth nearly $32 billion, which were recorded off-balance-sheet and not broken down. This could encompass non-deliverable contracts settled in naira, which wouldn’t deplete reserves, as well as commitments with longer tenures.

Despite recent exchange-rate liberalization and improvements in the monetary policy framework, Fitch cautioned that Nigeria’s credit profile still faced significant challenges due to a loss of reform momentum and constrained reserves.

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In a related development, JP Morgan revealed that Nigeria’s total currency swaps reached $21.3 billion at the end of 2022, underscoring the ongoing pressures on the FX market.

The CBN countered JP Morgan’s estimate, with Hassan Mahmud, the Director of the Monetary Policy Department, asserting, “We have the numbers there…The central bank’s reserves are on our bank net. Yes, the figure you see today may not be exactly to the last decimal point, but you have that picture that you are seeing there.”

He also noted the presence of $33 billion, IMF facilities, SDR, JP Morgan numbers, and forwards in the bank’s reserves, dispelling concerns about transparency in their reporting.

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