Fitch Ratings has reported that the Central Bank of Nigeria’s currency swaps with local banks will be worth between $10 billion and $12 billion by the end of 2022.
According to The Punch, it was said that this represented 30% of the country’s gross reserves (at $37 billion as of the end of 2022) and consisted of swaps with domestic banks and other parties.
This highlighted the country’s external weaknesses and showed that the net reserve position may be poorer than expected, according to the international rating agency.
Following the recent release of the CBN’s financial results, it announced this in a paper titled “Nigeria’s weaker reserves highlight external risk and policy challenges.”
The report said, “Fitch believes that CBN swaps with domestic banks were $10 billion to $12 billion by the end of 2022, and are expected to remain close to that level, but there is less insight on swaps it may have with overseas counterparties. This estimate is based in part on survey data.
“We expect that the majority 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 foreign banks,” said the report.
According to the statement, the CBN’s most recent release of consolidated financial records to the end of 2022, which was a long time coming, revealed that the net reserve position might not be as strong as we had anticipated. The declarations, which verified considerable liabilities, boosted Nigeria’s reserve transparency, but significant gaps persisted, making it impossible to make a trustworthy evaluation of the net reserve situation.
“We stated that external finances were a key rating sensitivity when we affirmed Nigeria’s rating at ‘B-‘ with a Stable Outlook in May,” according to Fitch.
“We calculated that about 30% of Nigeria’s total reserves—$37 billion at the end of 2022 were made up of swaps with local banks, though we thought that some additional reserves would also be subject to encumbrances.
The credit rating company emphasized that according to the CBN financial records, liabilities as of the end of 2022 included $7.5 billion in securities lending, of which 5.5 billion dollars were short-term obligations, and $6.8 billion in short-term obligations from foreign-currency forward payables.
The recent liberalization of exchange rates and enhancements to the overall monetary policy framework, according to Fitch, could improve the country’s credit profile by reducing supply constraints on foreign currency, but a recent decline in reform momentum and the constrained reserve position highlighted the significant difficulties these policy adjustments faced.
The reserve declarations, it was noted, counterbalanced more recent improvements to Nigeria’s credit status.
JP Morgan recently revealed that the country’s overall currency swaps were expected to reach $21.3 billion by the end of 2022. It said that the low net FX reserves indicated ongoing pressures on the FX market.
A recent estimate of Nigeria’s foreign reserves by JP Morgan was also criticized by the Central Bank of Nigeria as being given out of context.
The CBN’s Director of Monetary Policy, Hassan Mahmud, provided an explanation on the estimate of Nigeria’s reserves, saying, “We have the statistics there. The reserves of the central bank are on our bank network. Yes, the number you see today might not be accurate to the very last decimal point, but you still have that picture.
“We have $33 billion, an IMF facility, an SDR, the JP Morgan numbers you mentioned, and forwards, all of them are there,” the speaker continued.
