Fitch Revises Nigeria’s Outlook to Stable, Affirms ‘B’ Rating

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Obinna Chima
Fitch Ratings has revised the outlook on Nigeria’s long-term foreign-currency issuer default rating (IDR) to stable, from negative.
It also affirmed the country’s IDR at ‘B’. According to a statement, the revision of the outlook reflects a decrease in the level of uncertainty surrounding the impact of the global pandemic shock on the Nigerian economy.

It pointed out that oil prices have stabilised, while global funding conditions have eased and domestic restrictions on movement have started to be relaxed.
“Nigeria has navigated external liquidity pressures from the shock through partial exchange rate adjustment combined with de facto capital flow management measures and foreign-currency (FC) restrictions, while disbursement of external official loans has supported the level of international reserves.

“While external vulnerability persists from currency overvaluation and a possibly large FC demand backlog, this is adequately captured by the ‘B’ rating, in our view,” it added.
The global rating agency noted that the Central Bank of Nigeria (CBN) has continued to prioritise exchange rate stability over other policy goals.

It further pointed out that, “the Central Bank of Nigeria (CBN) has achieved progress towards its stated goal of unifying the exchange rate, following a cumulative 19 per cent two-step devaluation of the ‘official’ exchange rate, which is mostly used for the government and the oil sector’s FC transactions.”

According to Fitch, the broad stability of the I&E rate since end-March has been mostly achieved through a severe contraction in FC supply, illustrated by a drop in the average value of daily transactions on the I&E window by 87 per cent in April-August relative to the first quarter 2020 average.

Tightening FC supply for trade and financial transactions could harm growth and exacerbate inflationary pressures, driving further misalignment of the naira’s real exchange rate, the agency warned.
“Unfulfilled FC demand could constitute a drain on reserves once supply is relaxed. The CBN has started to increase FC provision in September through a combination of spot and forward sales but the magnitude of actual FC outflows in case of full supply normalisation is unknown.

“We understand that the stock of outstanding non-resident holdings of CBN open-market operation (OMO) bills was around $10 billion in August. Non-resident investments in short-term money market instruments amounted to $27.7 billion at end-2019, equivalent to 72 per cent of international reserves at the time, more than half of which were in OMO bills.

“De facto FC restrictions could also damage investor confidence and possibly lead to Nigeria’s exclusion from benchmark equity indices, durably impeding a return of foreign inflows.

“This would place the onus of rebuilding reserves on sovereign external borrowing amid continued current account (CA) deficits. The government has secured multilateral loans of $4 billion in 2020, of which $3.4 billion is from the International Monetary Fund (IMF), helping a recovery in international reserves from a 30-month low of USD 33.4 billion in April to $35.8 billion on 24 September. We understand that around 15 per cent of international reserves are pledged in swaps,” Fitch added.

According to Fitch, the ‘B’ rating also reflects the country’s weak fiscal revenues, comparatively low governance and development indicators, high dependence on hydrocarbons and a track record of subdued growth and high inflation.

It pointed out that the rating weaknesses were balanced against the large size of Nigeria’s economy, low general government (GG) debt relative to GDP, small FC indebtedness of the sovereign and a comparatively developed financial system with a deep domestic debt market.

“Low fiscal revenues are a major credit weakness. GG receipts averaged 6.8 per cent of GDP in 2015-2019, well below the current ‘B’ median of 22 per cent. Revenues will benefit from the removal of the fuel subsidy, which has cumulatively cost the budget around seven per cent of 2019 GDP in 2016-2019.

“The government has affirmed its firm commitment to this reform as well as its intention to continue phasing out costly electricity subsidies. However, the energy price reform faces strong opposition from labour unions and the authorities have reinstated subsidies in the past in response to social protests.”