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Banks’ $5bn swap positions to further depress external reserves

By on January 14, 2016

Nigeria’s shrinking external reserves are expected to decline further due to the settlement of large swap positions between the banks and the Central Bank of Nigeria (CBN).

According to estimates, the overall swap books of some Nigerian banks currently stands at about $5 billion, with most of it to be paid back this year. However, findings showed that there were some 400-day swap deals that were done in the fourth quarter of 2015.

A swap is a derivative in which two counter parties exchange cash flows of one party’s financial instrument for those of the other party’s financial instrument. The central bank liquidity swap consists of an agreement between two central banks, at least one of which must be an international currency issuer, to swap their currencies. The central banks, parties to the swap transaction can lend the proceeds of the swap, against collaterals they deem adequate, to the commercial banks within their jurisdiction, to provide them with temporary liquidity in a foreign currency.

Nigeria’s external reserves extended its decline into 2016 as it closed lower at $28.931 billion last Thursday, compared with the $29.070 billion it was at the end of 2015. This represented a drop by $139 million in the first seven days of 2016.

“The estimated swap position alone would take the Nigeria foreign exchange reserves down from the present $29 billion to $24 billion. As at nine-month 2015, some of the banks within our coverage reported gains from derivative instruments which, in our view, are mostly swap contracts. For instance, Access Bank recorded a significant derivative income of about N47.2 billion as at nine-month 2015.

“One of our key concerns of late has focused on the expected shrinkage in bank’s Net Interest Margins following the decline in yields and their approach to dealing with it. With the income from the swap deals expected to phase out through 2016, we believe the loss of swap income in 2017 will also negatively impact bank’s performance,” analysts at CSL Stockbrokers Limited stated.

Also, the Head of Research at Afrinvest Securities Limited, Mr. Ayodeji Ebo, noted that the development may put further pressure on the CBN.

“If these obligations are not met, the foreign banks may have to review their business relationship with Nigerian banks. So, the CBN may be under pressure to release these funds, which would further impact on the external reserves which currently cover about four months of imports. And in our view, it further raises the ability to defend the naira. This may lead to further outflows from the economy,” Ebo said in a telephone chat with THISDAY.

The drop in the forex reserves has been largely attributed to the significant reduction in forex inflow into the country occasioned by the sustained low crude oil prices. Oil prices have been hovering around $36 per barrel in the past few weeks.

This made the central bank to introduce several measures aimed at preserving the reserves and ensuring exchange rate stability.

For instance, the central bank last year harmonised the foreign exchange market by closing the official window of the foreign exchange market in order to create  transparency  and minimise arbitrage  opportunities  in  the  foreign  exchange market.

Furthermore, to  deepen  the  market  and enhance  the  efficacy  of  the  demand  management  measures,  the central bank  gave  specific  directives  on  the  effective  monitoring and repatriation of both oil and non-oil  export proceeds. In addition, the utilisation of export  proceeds  was restricted  to  eligible transactions only to minimise leakages. Also, it stopped the sale of dollars for a list of 41 items as it also sought to reduce pressure on the external reserves.

 

[ThisDay]