IMF cautions Nigeria on $5bn Abu Dhabi swap deal

Nigeria is being advised by the International Monetary Fund (IMF) to proceed with caution regarding a proposed $5 billion Total Return Swap financing arrangement with First Abu Dhabi Bank. The IMF has flagged such structures as potentially opaque and risky, despite Nigeria's recent improvements in accessing international capital markets.

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We say in the report, and our view is that the transaction and these types of structures carry risks. Usually, they are opaque. So, the terms are not always very transparent when we review these instruments across countries.

Christian Ebeke, the IMF Resident Representative for Nigeria, stated during a virtual press briefing that the proposed transaction and similar structures carry inherent risks and often lack transparency. He noted that the terms of these instruments are not always clear upon review across different countries. This caution comes shortly after the Nigerian Senate approved the government's request to raise up to $5 billion through this swap arrangement.

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They also carry risk, as we flag in the report, the margin calls in the case that the value of the asset drops or the currency depreciates.

Beyond transparency issues, Ebeke pointed out that these financing arrangements could expose Nigeria to additional financial dangers. These include the possibility of margin calls if the value of the underlying assets declines or if exchange rates move unfavorably. The IMF's report also flags these potential risks.

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We think that Nigeria has market access. Nigeria can issue Eurobonds to finance the deficit. And we also think that there are other avenues for Nigeria to raise funds, including on concessional terms.

The IMF suggested that Nigeria has more straightforward and transparent funding alternatives available. Ebeke mentioned that Nigeria can issue Eurobonds to finance its deficit and explore other avenues for raising funds, potentially on concessional terms. While the IMF does not yet possess detailed information on the specific swap structure, they urged Nigerian authorities to meticulously monitor its potential risks.

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At this point, we don’t have any further information on the TRS. But our view is that it carries risk, and it’s important to monitor those risks very, very carefully.