Nigeria’s credit rating outlook was lifted by the Fitch Ratings to positive from stable, six months after it said that reforms progress since President Bola Tinubu came to power in May last year was faster than anticipated.
The Fitch Ratings is a multinational credit rating agency. Investors use Fitch Ratings to help determine which investments are less likely to default and yield a good return.
Techeconomy has complied 14 reasons Fitch Ratings affirms Nigeria’s credit outlook positive:
1. Significant Reform
The positive outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.
Exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria (CBN) improved, central bank financing of the government scaled back and administrative efficiency measures are being taken to raise the currently low government revenue, as well as oil production.
2. Distortions Reduced
The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizeable inflows to the official foreign exchange (FX) market.
Nevertheless, we see significant short-term challenges, notably, inflation is high and the FX market has yet to stabilise and the durability of the commitment to reform is to be tested.
3. Exchange Rate Liberalisation
The CBN has stepped up efforts to reform the monetary and exchange rate framework following last year’s unification of the multiple exchange rate windows, and the large differential between the official and parallel market rates has collapsed.
Average daily FX turnover, at the official FX window has risen sharply from 2H23, and there has been clearance of USD4.5 billion of the backlog of unpaid FX forwards (the validity of the outstanding USD2.2 billion is being assessed by CBN), and weekly sales of FC to bureaux de changes (BDCs) have resumed (having been suspended since 2021).
4. Return of Sizeable Non-Resident Inflows
Greater formalisation of FX activity and monetary policy tightening has contributed to a significant rise in foreign portfolio investment inflows, and a fast appreciation of the naira at the official FX window, following the 71% post-liberalisation depreciation between June 2023 and mid-March 2024, although the exchange rate remains volatile.
However, Fitch views continued lack of clarity in the size of net FX reserves as a constraint on the sovereign’s credit profile.
5. Further Monetary Policy Tightening Expected
Fitch anticipates further increases in the CBN monetary policy rate in 2H24 (following the 600bp hike to 24.75% since February 2024 alongside tightening of reserve requirements) and strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR.
The company projected inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%.
6. Fiscal Revenue Improves
Fitch forecasts the budget deficit to widen 0.3pp in 2024 to 4.5% of GDP (but 0.5pp lower than it projected at the last review.
This is due to improving non-oil revenue and partial fuel subsidy removal being offset by underperformance in oil profits from Nigerian National Petroleum Corporation Limited (despite a potential improvement in oil production) and higher payments for debt servicing, personnel and capex.
Fitch Ratings projected a 2pp rise in general government (GG) revenue/GDP from 2023 to 2025 to 9.6%, helped by increased mobilisation of non-oil tax revenue, to narrow the budget deficit to 4.1% in 2025.
Nevertheless, the GG revenue/GDP ratio would remain one of the lowest of Fitch-rated sovereigns.
The government has sharply reduced recourse to its CBN ‘Ways and Means’ overdraft this year, and banks’ healthy foreign currency (FC) liquidity and strong demand for government securities support domestic financing capacity.
7. Improved Oil Production, Challenges Remain
Fitch Ratings expects oil refining capacity to increase in 2024-2025 as the Dangote plant ramps up, with an eventual 0.65mbpd capacity.
This will reduce transportation costs and lower refined oil imports, which should ease FX demand.
“We anticipate an increase in crude oil production (including condensates) in 2024-2025, averaging 1.75 mbpd, from 1.58 mbpd in 2023, helped by improved onshore surveillance, but this is still well below the 2019 level, reflecting underinvestment in the sector and production outages”.
8. Rating Fundamentals
Nigeria’s rating is supported by its large economy, developed and liquid domestic debt market, and large oil and gas reserves.
“It is constrained by weak governance indicators relative to peers’, high hydrocarbon dependence, limited crude oil production capacity, weak net FX reserves, high inflation, ongoing security challenges, and structurally low, albeit improving, non-oil revenue”, the report reads.
9. Extremely High Interest Expenditure:
Fitch expects GG debt/GDP to rise 2.6pp in 2024 to 44.8% (‘B’ median 53.2%), partly owing to currency depreciation, with the bulk of financing in 2024 domestically sourced.
Domestic borrowing costs have risen due to higher policy rates, and GG interest/revenue is one of the highest of Fitch-rated sovereigns at 38.2% in 2023 (‘B’ median 11.6%).
Nigeria’s public debt has a fairly long average maturity of 12.3 years, and nearly 61% is local-currency denominated, well above the current ‘B’ median of 35.9%.
10. Moderate Gross FX Reserves
Gross FX reserves fell to USD32.2 billion at end-April, from a peak of USD34.4 billion in mid-March, partly reflecting repayment of existing debt obligations, and FX sales to BDCs to support the currency.
Fitch projects a broadly flat current account surplus, averaging 0.5% of GDP in 2024-2025, supported by a modest rise in oil production and remittances.
“We forecast FX reserves to fall to 4.2 months of current external payments at end-2024 (‘B’ median 4.2), from 4.4 months at end-2023”.
11. Weak Net FX Reserves
Uncertainty continues over the net FX reserve position, with a particular lack of clarity on near USD32 billion of “FX forwards, OTC futures, and currency swaps” recorded as an off-balance sheet “commitment” in CBN’s last consolidated financial statement for 2022.
Fitch estimates around 30% of Nigeria’s reserves are made up of FX bank swaps, although we expect most of these to continue to be rolled over.
12. External Debt Service Rises in 2025
Government external debt service is moderate, expected at USD4.8 billion in 2024 and USD5.2 billion in 2025 (with USD2.9 billion of amortisations, including a USD1.1 billion Eurobond repayment due in November).
The government plans to meet its external financing obligations through a combination of multilateral lending, syndicated loans, and potentially from commercial borrowing 0
13. Banking Sector Resilience
The banking sector has been resilient to the impact of the sharp devaluation on the capital adequacy ratio (end-11M23: 12.3%) given balance sheet structures, including net long FC positions, which delivered large FX revaluation gains in 2023 and 1Q24.
While we expect the non-performing loan ratio (end-3Q23: 4.2%) to rise in 2024, loan books are small (end-2023: 35% of banking sector assets) and overall asset quality remains closely aligned with sovereign creditworthiness, given high fixed-income securities and cash reserves at the CBN.
Fitch anticipates a marked increase in equity issuance and M&A in the next two years, to comply with a significant increase in paid-in capital requirements.
14. ESG – Governance
Nigeria has an ESG Relevance Score (RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption.
“These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM).
Nigeria has a low WBGI ranking at the 17th percentile, reflecting weak institutional capacity, uneven application of the rule of law and a high level of corruption”, the company said.
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