May 04, (THEWILL) – Fitch Ratings has upgraded Nigeria’s credit rating outlook from stable to positive, saying the new rating partly reflects significant reforms by President Bola Tinubu to support the restoration of macroeconomic stability and enhance policy coherence.
It affirmed Nigeria’s long-term foreign-currency issuer default rating at B-.
THEWILL reports that the new rating is coming exactly six months after Fitch had on November 3, 2023, rated Nigeria’s credit outlook stable and said reform progress since President Bola Tinubu came to power in May 2023 was faster than it anticipated.
In a statement on Friday, Fitch said the revision of the outlook reflects the following key drivers and their relative weights:
“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.
“Distortions Reduced: The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizable 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.
“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 bureau de changes (BDCs) have resumed (having been suspended since 2021).
“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 the continued lack of clarity in the size of net FX reserves as a constraint on the sovereign’s credit profile.
“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. We project inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to an average of 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%.
“Fiscal Revenue Improves, Still Low: Fitch forecasts the budget deficit to widen 0.3pp in 2024 to 4.5% of GDP (but 0.5pp lower than we projected at our 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.
“We project 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.
“Improved Oil Production, Challenges Remain: We expect oil refining capacity to increase in 2024-2025 as the Dangote plant ramps up, with an eventual 0.65 mbpd 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.”
The statement further explained that the B- rating for long-term foreign currency issuer default reflects:
“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.
“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%.
“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.
“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 that 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.
“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 commercial borrowing.
“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 in order to comply with a significant increase in paid-in capital requirements.
“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.”
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