Nigeria SWF Currency Swap Exposure to Central Bank Hits N797bn

The Nigeria Sovereign Investment Authority (NSIA), managers of the country’s Sovereign Wealth Fund (SWF) had foreign currency (FX) swap exposure to the Central Bank of Nigeria (CBN) equivalent to N797 billion ($893 million) in the third quarter (Q3) of 2023, up from of N167 billion ($372 million), as at December 2022.

An FX swap is a financial transaction in which two counterparties exchange specific amounts of two different currencies at the outset and repay at a future date according to a predetermined rule reflecting both interest payments and amortization of the principal.

The effective closing rate of the naira vs. dollar as at 31 December 2022 was N448.55/ US Dollar, according to NSIA financials. The naira closed trading at N891 vs. the dollar on Friday, Jan 26, according to data from the FMDQ.

Currency swaps with the CBN which avails USD liquidity to the apex bank while providing an avenue to boost earnings was the single largest component of the NSIA’s investment portfolio as at Q3 2023.

NSIA’s total investment portfolio stood at N1.683 trillion and accounted for a predominant 88.5% of total assets as at September 2023.

The investment portfolio which transverse the three operated funds largely comprised currency swaps, hedge funds and long-only equity investments, private equity investments, fixed income products and US treasury notes.

Nigerian banks and financial services companies like the NSIA placed significant foreign currency (FX) with the central bank in the form of derivative transactions (including swaps and forwards). The Central Bank of Nigeria (CBN) said last year that it cleared matured foreign-exchange (FX) forward contracts with an unspecified number of banks, there was no word on swaps estimated to be between $18 billion and $21 billion.

The Authority commenced operations with a seed capital of $1 billion in October 2012, and received four additional capital contribution tranches totaling $795 million after the initial contribution.

The NSIA is jointly owned by the Federal Government of Nigeria (45.8%), the 36 States (36.2%), the 774 Local Government Authorities (17.8%) and the Federal Capital Territory (0.2%).

Meanwhile, the NSIA received a capital injection of $45 million in the first six months (H1) of 2023, from price-based royalties from oil companies.

The Petroleum Industry Act (PIA) signed in August 2021 introduced a price-based royalty of up to 10% on crude oil sales that would be credited to NSIA as equity.

Analysts expect more capital will flow to the NSIA as more crude oil contracts are migrated to the PIA regime, and more oil exporting companies fully adopt the PIA.

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