UNDERSTANDING NIGERIA-CHINA CURRENCY SWAP DEAL- BUSINESSDAY

The Central Bank of Nigeria (CBN) signed a $2.5bn bilateral currency swap with the People’s Bank of China (PBoC), making Nigeria, the third country in Africa (after South Africa and Egypt) to sign such a deal with China.
The agreement will allow the two sides to swap a total of RMB15bn for NGN720bn, or vice versa, in the next three years. The deal can be extended by mutual consent.
The currency-swap was calculated at the Nigerian central bank’s interbank rate of NGN305:USD1, rather than the Nigerian Foreign Exchange Fixings (NIFEX) rate of NGN338.7:USD1. This implies that we are unlikely to see any unification between Nigerian exchange rates anytime soon.
The deal aims to facilitate bilateral trade and investment but also to promote financial stability and broader economic cooperation between the two countries. It will also help the country to position itself as a trading hub with China in the West African sub-region.
This agreement will provide NGN liquidity to Chinese firms looking to do business with Nigeria and provide RMB liquidity to Nigerian firms looking to do business with China, helping achieving effectiveness and efficiency in trade transactions between the two countries, without being exposed to the challenge of seeking another foreign currency.
In terms of the impact implication, we believe that pressure on Nigerian importers who need US dollars to import goods from China is likely to dissipate, improving CBN’s management of the country’s FX reserves.
Nigeria’s FX reserves have improved over the past year and stands at USD47.0bn (as of April 2018) from USD30.9bn a year ago, reflecting improved oil receipts alongside significant FPI inflows via the Investor and Exporter (I&E) window introduced in April 2017. The CBN has also diversified its FX reserves away from the dollar by switching into Yuan, which currently represents approximately a tenth of its total reserves.
In addition, this agreement (in addition to ongoing import ban on selected items) is likely to reduce further the strong demand for the USD and support the NGN.
With improved trading activity, stronger FX reserves and continued CBN support, the official exchange rate has been static at NGN360:USD1. In light of this new currency swap, we expect a strengthening bias on the NGN in the near term as this agreement is likely to improve FX liquidity and lead to higher flows from China.
The CBN is likely to retain its exchange rate at NGN305-306:USD1 and maintain interventions in the Secondary Market Intervention Sales (SMIS) windows at the NIFEX exchange rate of NGN327-340:USD1.
By year end, our expectations of lower oil prices and increased FPI exits from NGN assets ahead of the 2019 elections, are likely to offset some of the gains, resulting in softer NGN and bearish activity in the bonds market.