Fitch Warns Nigeria’s $5bn TRS Deal Could Intensify FX Pressures

Fitch Ratings has warned that Nigeria’s planned $5bn total return swap (TRS) financing arrangement with First Abu Dhabi Bank could increase foreign exchange (FX) pressures, deepen sovereign debt risks and weaken transparency in public debt reporting.

The rating agency raised the concerns in a report titled “Emerging Market Sovereigns’ Use of Total Return Swaps Raises Risks”, published on June 19, where it examined the growing use of derivatives-based financing structures by emerging economies.

According to Fitch, Nigeria’s proposed transaction, under which about $6.67bn worth of naira-denominated government bonds would be pledged as collateral for hard-currency funding, could expose the country to additional vulnerabilities during periods of economic stress.

It noted that margin calls under the arrangement would likely be payable in US dollars, even though the underlying collateral is denominated in naira.
Fitch said this structure could intensify FX pressures if domestic bond yields rise or if the naira weakens, potentially forcing the government to mobilise scarce foreign currency resources at inopportune times.

The agency also warned that such arrangements can become procyclical, requiring additional collateral or repayments when external liquidity conditions are already tightening.

Nigeria’s public debt stock stood at $110.3bn (about N159.2tn) as of December 31, 2025, according to official data cited in the report.

The warning comes as Nigeria pursues broader external borrowing plans approved by the National Assembly on March 31, including President Bola Tinubu’s $6bn external financing request.

The package includes two separate facilities from the United Arab Emirates and the United Kingdom, one of which is the proposed TRS arrangement with First Abu Dhabi Bank valued at up to $5bn.

Fitch noted that while total return swaps can provide liquidity, diversify funding sources and reduce borrowing costs relative to conventional borrowing, they often fall outside traditional debt reporting frameworks.

This, it said, may reduce legislative oversight and obscure the true scale of sovereign liabilities.

“Material gaps in transparency may also weigh on Fitch’s Issuer Default Rating assessment,” the agency stated, adding that such structures are typically documented under derivative agreements whose terms are only partially disclosed.

The rating agency further explained that in most TRS arrangements, governments issue bonds without selling them in the market but transfer the economic exposure of those instruments to a counterparty in exchange for cash.

In many cases, only the cash received is recorded as external debt, while the pledged securities are treated as contingent liabilities, potentially leaving them outside standard debt statistics.

Fitch cautioned that this accounting treatment can mask the true extent of a country’s obligations and complicate debt sustainability analysis.

It added that the legal structure of such deals, often classified as derivatives rather than conventional loans, can also allow them to bypass normal parliamentary scrutiny.

Despite the risks, Fitch acknowledged that such instruments can be attractive to sovereigns with liquidity constraints or elevated borrowing costs, as they can provide hard-currency financing even during challenging market conditions.

However, the agency maintained that Nigeria’s proposed structure appears to be driven more by funding diversification and liquidity management objectives than by lack of access to international capital markets, noting that the country has continued to tap global markets through Eurobond issuances.

The warning from Fitch follows a similar caution issued by the International Monetary Fund (IMF) on June 10, which also advised Nigeria to carefully assess risks associated with borrowing through derivatives-based arrangements linked to First Abu Dhabi Bank.

Analysts say the growing reliance on complex financing structures could heighten scrutiny of Nigeria’s debt strategy at a time when fiscal pressures, currency volatility and rising external obligations continue to shape macroeconomic policy decisions.