Fitch Flags Nigeria’s FX Reserves for Transparency Issue
Fitch Ratings has flagged Nigeria’s external or foreign currency (FX) reserves balance for transparency issues following the recent audited report released by the Central Bank of Nigeria (CBN). In a report, the global ratings agency noted that the audited report blocked reliable assessment of Nigeria’s net external reserves position.
According to Fitch, Nigeria’s weaker net international reserve position, as indicated in new data, emphasises the sovereign’s external vulnerabilities. It said that recent exchange-rate liberalisation and improvements in the overall monetary policy framework could however strengthen the sovereign’s credit profile.
“This could happen by easing foreign-currency supply constraints, but a recent loss of reform momentum and the constrained reserve position highlight the significant challenges such policy adjustments face”, the report added.
The recent publication of consolidated financial statements to the end of 2022 by the Central Bank of Nigeria (CBN), the first for many years, suggests the net reserve position may be weaker than we had anticipated.
The statements, which confirm sizeable liabilities, increase transparency around Nigeria’s reserves, but important gaps remain, preventing a reliable assessment of the net reserve position.
“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% of Nigeria’s gross reserves (which were USD37 billion at end-2022) comprised swaps with domestic banks, although we considered that some other reserves could well be encumbered”, Fitch said.
Fitch said the CBN financial statements indicate that liabilities at end-2022 include USD7.5 billion of securities lending (USD5.5 billion of which is short term), though it is unclear whether the pledged assets are reserve-eligible and are included in the CBN’s gross reserve figure.
In addition, there is a USD6.8 billion short-term liability from foreign-currency forward payables.
Particular uncertainty surrounds nearly USD32 billion of “FX forwards, OTC futures, and currency swaps”, which are recorded as an off-balance-sheet “commitment” but are not broken down.
“This could include some non-deliverable contracts settled in Nigerian naira, which would not be a drain on reserves, as well as commitments of a longer tenor”.
Fitch estimates, partly based on its survey data that CBN swaps with domestic banks were USD10 billion-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”.
The reserve disclosures offset more positive recent developments for Nigeria’s credit profile, the rating agency said in its report.
Fitch said policy reform, notably fuel subsidy withdrawal and greater exchange rate flexibility has proceeded more quickly than it had assumed in May assessment. > Naira Gains as CBN Limits Tenure of Banks Chiefs
The ratings agency views the newly appointed cabinet, particularly Finance Minister Wale Edun, as generally supportive of reform, but this can nonetheless face considerable socio-political resistance and progress is unlikely to be smooth, as highlighted by the government’s freezing of fuel prices in August.
Exchange-rate liberalisation should make it easier to attract capital inflows, supporting the country’s external position, on which lacklustre domestic oil production, which was 1.3 million barrels a day (including condensates) in July, remains a drag.
However, official and parallel exchange rates diverged again in August, undoing some of the narrowing seen after June’s depreciation of the official rate and highlighting the challenges to sustaining exchange-rate liberalisation.
The divergence may partly reflect the CBN’s reluctance to allow further official rate depreciation due to high consumer price inflation, which hit 24.1% in July.
“We understand the CBN has made only partial progress in clearing its backlog of unsettled foreign-exchange forwards, highlighting ongoing foreign-currency shortages, and a weaker net reserve position could hamper the pace of exchange-rate liberalisation through more constrained FX supply and the potential to weigh on investor sentiment”.
Nigeria’s gross foreign reserves fell by USD3 billion in January-August 2023, reaching USD34 billion in August, equivalent to around 4.1 months of current external payments. #Fitch Flags Nigeria’s FX Reserves for Transparency Issue