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CBN’s currency swap hits $12bn amid weak reserves

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Fitch Ratings has estimated the Central Bank of Nigeria’s (CBN) currency swaps with domestic banks to be between $10 billion and $12 billion as of the end of 2022.

It stated that this was 30 percent of the country’s gross reserves (at $37 billion as of 2022’s end) and comprised swaps with domestic banks and others.

According to the international rating agency, this suggested that the country’s net reserve position may be weaker than anticipated and emphasized its external vulnerabilities.

It disclosed this in a report titled ‘Nigeria’s weaker reserves highlight external risk and policy challenges’, following the recent publication of the CBN’s financial statements.

The report added that “Fitch estimates, partly based on our survey data, that CBN swaps with domestic banks were $10 billion to $12 billion at end-2022 and are likely to remain close to that level, but there is less visibility on swaps it may have with international counterparties.

“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.”

It said the recent publication of consolidated financial statements to end-2022 by the CBN, the first for many years, suggested the net reserve position may be weaker than we had anticipated. The statements, which confirmed sizeable liabilities, increased transparency around Nigeria’s reserves, but important gaps remained, preventing a reliable assessment of the net reserve position.

Fitch said, “When we affirmed Nigeria’s rating at ‘B-’ with a Stable Outlook in May, we stated that external finances were a key rating sensitivity. We estimated that around 30 percent of Nigeria’s gross reserves (which were $37 billion at end-2022) comprised swaps with domestic banks, although we considered that some other reserves could well be encumbered.”

The credit rating agency highlighted that the CBN financial statements indicated that liabilities as of the end of 2022 included $7.5 billion in securities lending ($5.5 billion of which was short-term) and $6.8 billion in short-term liabilities from foreign-currency forward payables.

It stated that uncertainty surrounded the near $32 billion of “FX forwards, OTC futures, and currency swaps”, which were recorded as an off-balance-sheet commitment but are not broken down.

It was noted that this could include some non-deliverable contracts settled in naira, which would not be a drain on reserves, as well as commitments of a longer tenor.

Fitch said the recent exchange-rate liberalization and improvements in the overall monetary policy framework could strengthen the country’s credit profile by easing foreign-currency supply constraints, but a recent loss of reform momentum and the constrained reserve position highlighted the significant challenges these policy adjustments faced.

It noted that the reserve disclosures offset more positive recent developments for Nigeria’s credit profile.

Recently, JP Morgan disclosed that the country’s total currency swaps stood at $21.3 billion as of the end of 2022. It stated that slow net FX reserves meant continued FX market pressures.

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