Nigeria Net FX Reserve Was $17.4bn in 2022 – CardinalStone
Nigeria’s net international reserve was $17.4 billion at the end of 2022, multi-asset investment firm CardinalStone Partners said in an update amidst unsettled dust that followed the central bank (CBN) audited reports.
At the official rate translation, the balance in Nigeria’s external reserves was about N15 trillion in the CBN balance sheet. The update comes in stark contrast to about $17 billion negative external balance put forward by analysts at Cordros Capital Limited.
The CBN published its annual financial statements for 2016 to 2022 on the 10th of August, 2023 amidst investigation. President Bola Tinubu is investigating CBN under Godwin Emefiele, suspended and detained apex bank governor, a move some analysts see as an indictment on ex-president Muhammadu Buhari’s administration.
In addition to financial performance numbers, the 2022 report highlighted the assets and liabilities composition of the gross FX reserves, CardinalStone said this could help ascertain Nigeria’s Net International Reserves (NIR) and the external vulnerability of this buffer.
Citing IMF guidelines, analysts said multiple statistical frameworks can be used to compute the NIR due to diverse views on how linked liabilities and special drawing rights (SDR) allocations should be treated.
The investment firm said its analysis of the CBN audited numbers indicates that, as of the end of 2022, Nigeria had a positive NIR position of $17.4 billion. Put side by side, Cordros Capital’s calculation showed that external reserves was about $17 billion negative.
The street economists’ position has not been different with a view that Nigeria’s external reserve was overinflated as a result of CBN deals with J.P Morgan and Goldman Sachs.
CardinalStone said in its commentary note that while material external shocks could raise concerns over the NIR, the positive 2022 position still suggested little legroom for maneuvering for the monetary policy.
“.. we analysed key reserve obligations dragging the computed NIR. These obligations include the securities lending agreement with Goldman Sachs and J. P. Morgan, the financial guarantee for the Bank of Industry (BOI), and derivatives contracts.
“Using available information, we note that the securities lending agreement was for a cumulative facility of $7.5 billion, for which an equivalent value of the group’s foreign securities holdings was pledged in exchange for the cash.
“The data also suggests that these facilities (largely short-term) have been constantly rolled over since 2021, given the mostly unchanged closing balance in the latest financial report.
“For us, this assumption and the expected temperance in global interest rates suggest limited rollover risk for the facilities in the near term”, CardinalStone said in the report.
The report noted that the CBN provided the BOI a financial guarantee on a €750 million syndicated loan from a consortium of international banks (Afrexim and Credit Suisse) in 2020.
Citing Fitch report, analysts at CardinalStone stated that BOI’s asset quality has improved, with stage 3 loans accounting for 3.8% of total loans as of full year 2022 from 5.7% in 2018. In addition, Fitch highlighted the bank’s ROE of 13.5% and B- crediting rating as pointing to a stable outlook with a low risk of default.
“The foregoing suggests that the CBN is unlikely to be impacted by losses linked to a potential BOI default on the guaranteed facility in the near term”, the investment firm said. Analysts said the IMF framework adopted in this report also deducts futures, forwards, swaps, and options to obtain the NIR.
CBN’s off-balance sheet forwards and OTC futures are Naira-settled and are included in the computation since the direct burden of dollar sourcing upon maturity does not fall on the apex bank, the firm said, extending its view over the decision to resume open market operations after seven months of lockdown.
CardinalStone confirmed that the CBN re-opens OMO to attract foreign inflows. MarketForces Africa reported that the CBN resumed OMO bills sales after long holidays. The first OMO issuance program since December 29, 2022.
“We attribute this shock issuance to the need to arrest the persisting FX shortfall across markets”.
In particular, the stop rate on the one-year instrument may have been deliberately set at 14.5% vs 1-year NTB’s 9.8% to kick-start attempts to capture the interest of foreign capital providers.
We expect further increases in the OMO rate to cascade to sell-offs in domestic fixed-income instruments as banks rotate out of them in favour of high-yielding OMOs.
Given the inflation levels, the developments in the OMO space may take some time to drive the sort of FPI inflows required to stem the domestic FX pressures.
Analysts identify the need for fiscal authorities to explore the possibility of obtaining dollar facilities from multilateral institutions or commercial lenders in foreign markets, with the latter likely to take the form of Eurobonds. Nigeria’s external reserves settled at about $34 billion, according to latest data from the CBN. #Nigeria’s Net Foreign Reserves Was $17.4bn in 2022 – CardinalStone