Nigeria’s bad – Net FX reserves are “significantly lower” than previously estimated, according to a recent analysis by JPMorgan. The American multinational financial firm said the new information is based on partial information from the audited financial accounts of the Central Bank of Nigeria.
“We estimate that CBN’s net FX reserves were around US$3.7bn at the end of last year, from US$14.0bn at end-2021,” JPMorgan said.
Investors have expressed concern that Nigeria’s external reserve is far lower than what the central bank is presenting, referencing the apex bank’s inability to fulfill many of its financial obligations.
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Nigeria’s central bank said the country’s foreign reserves stood at $37.09bn as at December 2022, and at $40.52bn as at the end of December 31, 2021
But information from the recent CBN audit reveals that Nigeria’s foreign reserves are far below what the central bank has been publishing for months because much of it has been used to securitize lending from foreign banks.
A statement posted on the CBN’s website said that “the Group entered into a securities lending agreement with Goldman Sachs and J. P. Morgan and as part of the agreement, the Group pledged its holdings on foreign securities in return for cash. The cash received from Goldman Sachs is N0.23 trillion ($500 million), 2021: N0.22 trillion ($500 million), and JP Morgan N3.23 trillion ($7 billion), 2021: N3.05 trillion ($7 billion) is recognized in other foreign securities.”
This revelation implies that the actual worth of current Nigeria’s foreign reserves, previously thought to be approximately $30 billion, going by the CBN’s figures, is in fact, around $17 billion.
Though JPMorgan said the $3.7bn net FX reserves estimate was done with a few assumptions, which if incorrect would substantially change the picture, the report paints a very gloomy picture for Nigeria’s FX market and explains, among other things, why the pegs on the dollar were removed.
“This settles the argument on why the dollar peg was removed; you CANNOT peg with $3.7b,” financial analyst, Kalu Aja, said.
JP Morgan is saying that they estimate the CBN external reserve position is JUST $3.7b…NO TYPO.
JP Morgan took the $14bn in 2021,
1. back out IMF SDR of $5b. SDR is like Nigeria borrowing from the IMF "cooperative" society; all members have SDR which they can draw on, not a… pic.twitter.com/lRfFS0qsnt
— Kalu Aja (@FinPlanKaluAja1) August 21, 2023
JPMorgan listed the assumptions as follows: (i) an addition of US$5.0bn in IMF Special Drawing Rights (SDR) to external reserves in order to arrive at total gross FX reserves of US$37.8bn, broadly in line with the 30-day moving average of US$37.08bn previously published on the central bank’s website; (ii) 11 adjusting the gross external reserves with three key FX liability lines that include FX forwards (US$6.84bn), securities lending (US$5.5bn) and currency swaps (US$21.3bn); and (iii) estimating currency swaps by backing out FX forwards and outstanding OTC Futures balances from an overall aggregate published in the financial accounts.
Financial analysts believe that this new information confirms the fears of investors and will continue to deter foreign direct investments (FDIs) if not urgently addressed.
“This is the main reason foreign investors have refused to bring in their funds,” Kelvin Emmanuel, Co-Founder and CEO at Dairy Hills said. “Principles work, so if you’re taking steps and things are not responding, then there’s something off somewhere, and this right here is the dead body in the woods.”
He explained that what is really remarkable is Nigeria’s Balance of Trade for 2022, which was $46.93bn for exports and $53.61bn for imports – putting the Balance of Trade at $6.68bn and outstanding forwards at $6.8bn.
Citing the Guidotti-Greenspan Rule that measures the ratio of reserves (Balance of payment for 1-Year to external debt); Emmanuel noted that Nigeria’s External Debt position is at $43bn while the balance of payments for One Year is $6.68bn. Going by the Rule, Nigeria’s external reserves (currently at $3.7bn) must not drop below its balance of payments ($6.68bn) for one year.
“If the principle of a float is not working, and black market premium that measures fair value to spot rate is over 5% and is currently at 11.3%. Then it means that a fundamental principle has been violated,” he said.
JPMorgan said the situation has compounded the nation’s forex crisis, noting that the Net FX position makes an FX float less likely and halts Eurobond upward price momentum.
The bank also noted that lower net FX reserves reduce the ability and willingness to introduce a flexible exchange rate regime in the near term.
“Owing to a structural balance of payments deficit in Nigeria, and a worse starting point for net FX reserves than previously anticipated, authorities’ ability to transition to a significantly more flexible exchange rate regime is severely hampered,” it said.
The New York-based financial firm further noted that the process of rebuilding reserve buffers is likely to be protracted as significant reforms are needed to attract foreign direct (and portfolio) investment on a multi-year basis.
“Perhaps short-term fixes could involve a swift improvement in oil output and significantly tighter monetary policy – authorities will have to increase the frequency of OMO auctions, which resumed last week. In the meantime, we remain on the sidelines, but on balance of risks we now believe selling USD/NGN NDFs may be the next trade given the reduced likelihood of further significant near-term FX adjustments,” it added.
Last week, the Nigerian government, through the Nigerian National Petroleum Company Limited (NNPCL) secured an emergency $3 billion crude oil repayment loan from Afreximbank. The loan, which has seen the naira up its performance in the FX market, was a big boost to the nation’s depleted foreign reserves.
The loan was expected to hold off investors’ concerns in the short term. But JPMorgan’s report is believed to have shattered the expectation.
“The coordinating Minister of the economy should call a press conference and speak, the markets need confidence from an adult that understands a balance sheet,” Aja, said.
“This JP Morgan report creates serious pressure on Nigeria’s ability to maintain a “strong” naira, and I fear it takes the winds away from the sails of that NNPC $3b. Nigerians want to know this, is the Naira safe to hold?” he added.