Fitch Ratings affirms Nigeria’s “B” rating with stable outlook

Nigeria’s ‘B’ rating is supported by the large size of the economy, a low general government debt-to-GDP ratio, amongst other variables.

By Ubah Jeremiah Ifeanyi

Fitch Ratings has revised Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B’ with a Stable Outlook.

The ‘B’ rating could be categorized as being in the non-investment-grade category when compared with the investment-grade category of ‘BBB’ to ‘AAA’. However, the ‘B’ may be seen to have a stable outlook as it is rated above the ‘CCC’ to ‘D’ (default).

This rating was supported by the large size of the economy, low debt-GDP ratio, small sovereign FX indebtedness of the sovereign, and comparatively developed financial system with a deep domestic debt market. However, the rating was suppressed by weak fiscal revenue, comparatively low governance and development indicators, high dependency on hydrocarbon, non-inclusive growth, and hyperinflation.

Furthermore, external liquidity pressures amplified by the COVID-19 pandemic led to the weakening of the Nigerian economic structure. Fitch forecasts an average inflation rate of 16% in 2021 and 13.4% in 2022 driven by several cost-push factors.

Despite CBN’s estimate on backlogs of FX demand and foreign portfolios’ investment, Fitch believes that a backlog of FX demands for imports and capital repatriation will constitute a major drain on the reserves when FX supplies normalize.

Fitch projects that continuous actions by the CBN to defend the dollar could protect reserves but would increase the scarcity of hard- currency. Moreover, fitch draws attention to the dangers of currency over-valuation as it would harm the corrections of external imbalances in the Nigerian economy.

Outlook

• Fitch forecasts negligible progress on boosting task revenue in the medium-term due to compliance issues, administrative capacity challenges, and resistance to the removal of tax credits.
• More projections were made on reducing the ‘GGG’ deficit to 4% of GDP in 2021 and 2022 from 6.3% in 2020. This improvement in the fiscal deficit will be primarily driven by the recovery in oil prices to well above the levels assumed in the 2021 budget.
• Fitch also raised concerns about the government’s attempts to eliminate implicit fuel price subsidy but retail prices are yet to align to the increase in benchmark prices of 2021, which could return the Nigerian economy to an implicit subsidy.
• Due to the massive debt accumulated by the government borrowing from CBN, from 2015 to September 2020 of N13.2 trillion which constitutes 8.6% of GDP. Fitch raised concerns about the CBN’s ability to curtail inflation if this pattern continues.

Suggestions for improvement

Fitch suggests that the most pressing factors that could collectively or individually lead to the upgrade of Nigeria’s credit rating are;

• Formidable resilience of external finance to address Nigeria’s on-going external vulnerabilities.
• Further mobilization of non-oil revenue from the domestic sector.
• Sustainable improvement of macroeconomic factors with a more inclusive economic growth.

What this means

• The international credit rating agency, Fitch gave Nigeria a less than positive rating with an optimistic outlook of further reduction in inflation and Debt-GDP ratio.
• The pros of Nigeria’s economy constitutes primarily on its large consumer economy, relatively small foreign currency indebtedness, and developing financial system.
• However, the cons of the Nigerian economy were based on its weak fiscal revenue, less than desirable governance, growing dependency on hydrocarbon, weak growth rate, and high inflation.

Fitch Ratings, a credit rating agency that ranks the visibility of investments regarding their likelihood of default. The international scale credit rating of sovereigns public finance and infrastructure issues has a best-and-worst case rating ranging from ‘AAA’ to ‘D’ based on one’s historical performance.