Fitch Affirms Kaduna State Rating at ‘B’, Outlook Stable
Fitch Ratings has affirmed Kaduna government’s ability to honour the state’s financial obligations on a timely basis at ‘B’ with stable outlooks. The ‘B’ rating indicates that material default risk is present, but a limited margin of safety remains.
In the rating note, Fitch said its affirmation reflects the unchanged ‘b’ standalone credit profile (SCP), resulting from Kaduna’s ‘Vulnerable’ Risk Profile and a financial profile assessed in the ‘bbb’ category.
The ratings also factor in the state’s growing debt to fund necessary capital expenditure for the development of basic infrastructure and social services. Fitch Ratings analysts said Kaduna’s risk profile reflects the combination of weaker revenue and adjustability with weak expenditure sustainability coupled with weaker liabilities and liquidities.
Kaduna’s risk profile is influenced by the state’s weak socioeconomic profile and reliance on transfers from the federal government, which can be volatile as they depend on hydrocarbons.
Like all Nigerian states, Kaduna has broad duties and high spending needs, and it is sensitive to the weak operating environment. The rating note highlighted that Kaduna’s revenue robustness is hampered by its weak socioeconomic profile and reliance on transfers from the federal government.
In Fitch’s view, Kaduna’s estimated NGN403 billion operating revenue at the end of 2024 was dependent on monthly allocations from oil revenue from the FAAC (Federation Account Allocation Committee), as indicated by a 24% share of internally generated revenue (IGR).
FAAC revenue, which also includes VAT, works as an equalisation mechanism for Nigerian states as it allocates revenue based on a pre-defined formula.
Even in times of economic stress, Fitch expects Kaduna to sustain positive IGR and envisages tax revenue cumulative average growth rate (including VAT) of about 3% on average in 2025-2029.
Fitch believes Kaduna has low revenue adjustability as it has no tax-setting power on personal income tax (PAYE) or VAT.
“We estimate that an additional revenue increase -mostly through charges and fees- would cover less than 50% of a reasonably expected decline of revenue”.
The rating agency said Kaduna’s revenue potential depends on the state’s ability to broaden its tax base and enforce tax compliance.
The main fiscal revenue is from PAYE and land charges, for which Kaduna is implementing measures to expand the tax base.
Revenue adjustability is also limited by low affordability of additional taxation, as Kaduna’s GDP per capita is close to 50% of the national average.
It also noted that the operating environment is fragile, which weakens Kaduna’s control over total expenditure growth, influenced by high inflation, rising commodity prices, and supply constraints amid naira depreciation.
Kaduna has broad responsibilities and high spending needs to support the weak local economy. Spending responsibilities include education, economic development, healthcare, energy and the environment.
Fitch expects spending growth to outpace revenue growth in its rating-case scenario. The operating margin will remain positive, but we expect it to decline to about 45% from 75% estimated in 2024.
Ratings analysts said the Nigerian central government has no mandatory balanced budget rules for states, which are required to keep their deficits at 3% of national GDP.
Kaduna’s cost structure is moderately flexible, as around 70% of total expenditure in 2024 was capex that was partly financed by the operating balance and can be delayed.
Fitch believes that scope for expenditure cuts remains limited, given the need to increase healthcare services and infrastructure, but the state still has ways to be cost efficient.
The national framework for debt is evolving and borrowing limits are quite wide. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure.
Kaduna’s debt mostly comprises multilateral lending and loans with local banks. Debt is largely serviced by deductions from statutory allocation. Kaduna has material exposure to FX risk.
This has led to a sharp increase in debt since 2019 following the disbursement of a USD350 million loan from the World Bank.
In 2024, 97% of Kaduna’s NGN985 billion direct debt was in foreign currency and subject to the deep depreciation of the naira exchange rate since June 2023.
Fitch considers Kaduna’s liquidity weak as the state has no committed liquidity lines, and domestic banks rated in the ‘B’ category tend to extend credit lines either with short maturities or back-up from the federal government through direct deductions from FAAC for longer maturities. Fitch conservatively treats cash as restricted for payables.
Emergency liquidity may also come directly from the federal government, as in 2015-2016, with the Budget Support Facility helping states to meet liquidity shortfalls and fund payments of salaries and pensions.
Fitch considers Kaduna a type B local and regional government under its criteria. “Under our rating case of economic downturn, Kaduna’s debt payback ratio could deteriorate to close to 17x by 2029”
The ‘bb’ financial profile reflects Kaduna’s heavy fiscal debt burden, which could increase to above 500% by 2029 , while its actual debt servicing coverage will be 0.4x. Kaduna’s estimated fiscal performance sharply improved in 2024. FAAC revenues grew by +175%, fuelled by naira depreciation.
The estimated operating margin hit a record 74% from 41% in 2023. However, net adjusted debt grew to NGN1 trillion from NGN673 billion, mostly due to the impact of the naira depreciation on external debt.
Fitch expects Kaduna’s net adjusted debt to reach NGN3 trillion by 2029. Debt encompasses the effect of naira devaluation and Kaduna’s ambitious NGN2.5 trillion capex plan in 2025-2029 to fund construction and upgrades of infrastructure. #Fitch Affirms Kaduna State Rating at ‘B’, Outlook Stable Nigeria Gives Air Peace the Nod for Direct Flights to Brazil
