Nigeria: 12 Months After Premium Times Report, JP Morgan Confirms Nigeria's Forex Reserves Lower Than Estimated

"Net FX reserves are significantly lower than previously estimated," the firm said in its Africa Emerging Markets Research dated 17 August.

About 12 months after PREMIUM TIMES reported that Nigeria's external reserve was well below the balance on the gross reserves claimed by the Central Bank of Nigeria (CBN), global financial service firm JP Morgan on Monday put the nation's reserve estimate at $3.7 billion.

"Net FX reserves are significantly lower than previously estimated," the firm said in its Africa Emerging Markets Research dated 17 August. "Based on partial information from the audited financial accounts, we estimate that CBN's net FX reserves were around US$3.7bn at the end of last year, from US$14.0bn at the end-2021," it added.

In arriving at the estimate, JP Mogan said it made a few assumptions which if incorrect would substantially change the picture. The firm said the assumptions include the addition of $5.0 billion in IMF Special Drawing Rights (SDR) to external reserves in order to arrive at total gross FX reserves of $37.8 billion, broadly in line with the 30-day moving average of $37.08 billion previously published on the central bank's website; adjusting the gross external reserves with three key FX liability lines that include 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.

JP Morgan said low net FX reserves imply continued FX market pressures, but the CBN still has the ability to source FX at commercial and semi-commercial rates.

"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," it said.

"Furthermore, authorities are in the initial stages of identifying assets for sale, which may provide some medium-term relief. 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. In addition, the recently announced US$3bn loan to NNPC could help partly improve FX liquidity conditions in the market.

"We expect NNPC to sell the dollars to CBN and remit the naira proceeds to the government as upfront payments for oil revenues and taxes. That being said, the large external financing needs of the private sector will sustain FX pressure."

Conundrum

Last August, PREMIUM TIMES reported how the nation faced the risk of an empty treasury and rapid decline in reserves ahead of the general elections in February 2023.

This newspaper also reported that government officials and business leaders knowledgeable about the situation confirmed that an elected official drew the attention of the suspended governor of the Central Bank of Nigeria, Godwin Emefiele, to the fact that Nigeria's external reserves amounted to only $15 billion, well below the $36 billion balance on the gross external reserves claimed by the bank.

Financial analysts told this newspaper at the time that this would not have mattered much but for difficulties in different sectors of the economy, especially the export constraints that had seen the nation's petroleum monopoly unable to add to the reserves. The NNPC's inability to remit oil sales receipts to the CBN, despite elevated crude oil prices, was equally seen as one reason why the naira nose-dived in the parallel market.

Earlier this month, CBN's 2022 financials raised concerns among analysts and investors as details showed security borrowing from JP Morgan and Goldman Sachs could set Nigeria's credit rating on a free fall to junk amid efforts to reposition the economy.

The central bank, in its newly released 2022 financials, reported borrowing $7.5 billion from US banks JP Morgan and Goldman Sachs "in exchange for its securities to be held for collateral", a move analysts waned may impair the nation's fragile fiscal position and credit rating.

Silver lining

In its research report, JP Morgan said apparent stall in reform momentum and lower net FX reserves than expected unnerve markets, but it remains "cautiously optimistic".

It said that the nation's headline inflation may rise while the CBN is expected to deploy tightening tools to address the pressure.

"We now see headline inflation rising towards 28% by year-end. Although we expect inflation momentum to start downshifting from 4Q, headline inflation will still remain elevated, particularly on higher food costs.

"The president's decision to keep a cap on petrol prices is likely to provide some relief but the exchange rate is likely to remain on a depreciating path and put further pressure on prices, with the impact more broad-based. The CBN has had to tighten monetary conditions by hiking the monetary policy rate (MPR) by a token 25bp last month, while narrowing the corridor around the MPR.

"Also, the CBN conducted its first Open Market Operation (OMO) this year while charging a cash reserving ratio (CRR) on banks that fall short of its target loan-to-deposit ratio of 65%. Going forward, we think the CBN might focus on using other tightening tools, as opposed to raising rates via the MPR. As such, we keep our call for an unchanged MPR at 18.75% for the rest of the year."

The financial service firm said Nigeria's sovereign bond prices declined by 2.5-5pts across the curve since the central bank published its audited financial accounts late last week.

"Also, the decision to freeze petrol prices at current levels resulted in concerns that fuel subsidies may have been reinstated, further weighing on asset prices," it added.

"That said, the announcement of a cabinet which appointed technocrats in key positions, such as the Ministry of Finance may slow the eurobond price decline in the near term, even if a likely slower pace of reform implementation could limit bond upside from here. The foreign exchange market will remain in focus given the likely lower starting point for net FX reserves, with an overall balance of payments deficit pointing towards continued FX pressure."

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