A combination of foreign exchange forwards, securities lending, currency swaps, and outstanding contracts has weakened Nigeria’s net external reserves to an all-time low of $3.7 billion as of the end of last year, according to JP Morgan.
The American multinational financial services firm noted in an August 17 report that Nigeria’s net FX reserves are significantly lower than previously estimated.
The external reserves stood at $33.88 billion as of August 10, down from $37.08 billion at the end of last year, according to data from the Central Bank of Nigeria (CBN).
“We estimate that CBN’s net FX reserves were around $3.7 billion at the end of last year, from US$14.0 billion at end-2021,” JP Morgan said.
In arriving at the estimate, JP Morgan made a few assumptions: “FX forwards ($6.84 billion), securities lending ($5.5 billion) and currency swaps ($21.3 billion); and estimating currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.”
The report noted that Nigeria’s low net FX reserves mean continued FX market pressures, “but the CBN still has the ability to source FX at commercial and semi-commercial rates”.
“Nigeria’s exchange rate market remains fragmented. Since the adjustment of USD/NGN at the Investors and Exporters window a few weeks ago, interbank FX liquidity has not improved as much as anticipated, partly due to the re-introduction of de-facto controls limiting local trades and loose monetary policy conditions,” JP Morgan said.
It said Nigeria’s apex bank continues to intervene in small amounts at a rate of around N740-N750/$, without clearing the backlog of unmet FX demand.
“Given the highly profitable nature of the currency swap arrangements between the CBN and domestic commercial banks, we expect these to continue for some time, albeit in smaller sizes and arguably more punitive rates,” JP Morgan said.
The global investment bank noted that Nigeria is upping its game to unlock $17 billion from asset sales, a move aimed at relieving pressure on the country’s struggling FX liquidity.
“The authorities are in the initial stages of identifying assets for sale, which may provide some medium-term relief,” it said. “For example, the President’s policy advisory council has recommended the government sell down its stake in the most joint-venture oil and gas assets, a proposal that is estimated to bring in up to US$17bn.”
On Monday, the naira remained flat as FX dealers in the parallel market bought and sold dollars to customers at N855 and N860.
Investors said Africa’s biggest economy is in desperate need of dollars to boost its declining external reserves and prop up the value of its currency.
“JP Morgan has come out to confirm. The President really needs to address this thing and tell Nigerians the truth. Everyone knows he inherited a mess, but admitting reality is the first step to salvation,” Kelvin Emmanuel, CEO of Dairy Hills Ltd, said.
The lack of clarity on Nigeria’s external reserves worsened after the apex bank audited reports revealed it has a standing $14 billion loan obligation to entities including to American investment bankers, JP Morgan and Goldman Sachs.
“The CBN reports suggest that some of its loans were used to bolster Nigeria’s (Caa1 stable) foreign exchange reserves. Should this be the case, and given the liabilities’ short tenure, our assessment of Nigeria’s foreign-exchange reserve adequacy would weaken,” Moody’s Investors Service, a global financial rating agency, said in its note published on August 18, 2023.
The CBN’s audited report showed that it owes JP Morgan $7 billion and Goldman Sachs $500 million, while $6.3 billion is owed as foreign currency forwards.
Moody’s noted that assuming that the CBN borrowed the whole $14.2 billion to bolster foreign reserves, “we would roughly halve the 2022 year-end gross reserves of $30.3 billion to $16.1 billion”.
“Similarly, our External Vulnerability Indicator, which measures short-term external debt plus maturing long-term external debt and non-resident long-term deposits relative to official foreign reserves, would worsen to up to 200 percent from its 2023 forecast level of 100 percent,” it added.
Apart from Moody’s, JP Morgan also raised concerns on the recent news around the potential re-introduction of fuel subsidies at some level.
The global investment bank noted that Nigeria’s high debt-servicing needs and relatively lower net FX position make it imperative to continue on the reform path to attract FX flows.
“While Eurobonds only start maturing from 2025 onwards with continued maturities from 2027, Nigeria still has to service close to $2.5-$4.5 billion of public and publicly-guaranteed debt over the next few years,” it said.
To change the narrative, it said Nigeria would need foreign direct and other portfolio investments to attract FX inflows.
“Thus, in our view, continuing on the reform path would be imperative to allay concerns on the external side,” JP Morgan said.