Reforms: Fitch Revises Nigeria’s Outlook to Positive
Fitch Ratings has revised the outlook on Nigeria’s creditworthiness to positive from stable, and affirmed the sovereign rating at ‘B-‘.The revision of the Outlook reflects fresh assessment of the country’s key ratings drivers.
According to Fitch, Nigeria’s positive outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.
It noted that 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.
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, according to the rating note.
“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”.
Under Yemi Cardoso leadership, the rating agency noted that 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 second half of 2023, and there has been clearance of USD4.5 billion of the backlog of unpaid FX forwards and weekly sales of FC to bureaux de changes (BDCs) have resumed -having been suspended since 2021.
Fitch stated that 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.
Fitch anticipates further increases in the CBN monetary policy rate in second half of 2024 (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% year on year 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%”.
Fitch forecasts the budget deficit to widen 0.3pp in 2024 to 4.5% of GDP, 0.5pp lower than it projected at last review. It said 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”.
The rating note stated that 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.
“We expect oil refining capacity to increase in 2024-2025 as the Dangote plant ramps up, with an eventual 0.65 million barrels per day (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”.
Nigeria’s rating is supported by its large economy, developed and liquid domestic debt market, and large oil and gas reserves, according to Fitch.
The ratings 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.
Fitch expects general government debt/GDP to rise 2.6pp in 2024 to 44.8% , 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 interest/revenue is one of the highest of Fitch-rated sovereigns at 38.2% in 2023 compared with 11.6% median level. 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%.
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. The rating agency forecasted FX reserves to fall to 4.2 months of current external payments at end-2024.
It said 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 its analysts expect most of these to continue to be rolled over.
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. #Reforms: Fitch Revises Nigeria’s Outlook to Positive
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