Fitch Affirms Oyo State at ‘B’ with Stable Rating Outlook
Fitch Ratings has affirmed Oyo 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.
According to Fitch, the affirmation of Oyo State’s ratings reflects its continued dependence on revenue transfers from the federal government of Nigeria despite improving internally generated revenue (IGR).
It also reflects Oyo’s manageable debt, with some foreign-currency exposure. The Long-Term IDR is derived from the state’s Standalone Credit Profile (SCP) which Fitch assesses at ‘b’, reflecting a combination of a ‘Vulnerable’ risk profile and ‘a’ financial profile.
The rating note said the SCP also factors in comparison with other Nigerian states and with international peers, in particular South American local and regional governments.
Oyo’s operating performance is noted to be sensitive to changes in oil prices and rising adjusted debt to fund increasing capital expenditure (capex). Fitch said the state’s revenue structurally depends on federal transfers, which rely on oil-related proceeds and is, therefore, sensitive to commodity price swings.
To improve state infrastructure and administration, and to support economic development, Oyo aims to increase capex and boost IGR, but this is challenged by weak socioeconomic conditions.
Oyo’s revenue robustness is influenced by the state’s weak socioeconomic profile and reliance on transfers from the federal government.
Fuelled by inflation, a higher naira exchange rate against the dollar and the phasing-out of fuel subsidies, federal transfers (including VAT) doubled in 2024 compared with 2023 and represented about 80% of Oyo’s operating revenue.
“We expect it to remain higher than historical levels, owing to a higher naira exchange rate against the US dollar that compensates for oil price volatility”.
Part of federal transfers will be channelled to infrastructure projects, leading to higher capital revenue than in the past.
The state continues to improve its IGR, which rose 13% over the past five years, due to tighter control of the informal economy that expanded the tax base.
Oyo’s revenue potential depends on its ability to broaden the tax base and enforce tax compliance. The main fiscal revenue is pay-as-you-earn taxes, on which Oyo cannot set the rate, and land charges, where the state continues to target measures to expand the tax base.
The state’s ability to expand the tax base is limited by the large informal economy and the population’s low income, although its modest poverty rate compared with other Nigerian states suggests scope for upside.
Oyo has a broad set of responsibilities and high spending needs to support the local economy.
Spending responsibilities, both opex and capex, range from the social sector (22%, includes education and healthcare) to economic development (over 60%).
Oyo is exposed to a volatile operating environment, characterised by high inflation, rising commodity prices, and supply constraints resulting from naira depreciation, which collectively weaken its control over total expenditure increases.
The Nigerian central government has no mandatory balanced-budget rules for states, which are required to keep their deficits below 3% of national GDP.
Fitch considers Oyo’s cost structure fairly rigid, with staff-related payments (including pension) amounting to two-thirds of opex.
Although capex peaked at over 50% of the state’s total expenditure in 2024 (about 40% in the last five years), analysts believe there is limited scope to adjust, in light of planned investments in infrastructure and our expectation of cumulated capex above NGN1 trillion in 2025-2029.
The national framework for debt is evolving and therefore borrowing limits are quite loose. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure.
Oyo’s debt is mostly made up of domestic debt with local counterparties, including several federal government-sponsored facilities that collectively represented half of the state’s outstanding debt at end-2024; Fitch said it includes pension and contractors’ arrears in Oyo’s adjusted debt.
The state’s debt structure is fairly conservative, with amortising repayments over long maturities and fixed interest rates. The state’s debt is largely serviced by deductions from the statutory allocation.
Fitch considers Oyo’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 with back-up from the federal government through direct deductions from federal allocation for longer maturities.
The ratings agency conservatively excludes from its liquidity estimate restricted cash used for payables. Emergency liquidity may also come directly from the federal government, helping states to meet liquidity shortfalls and fund payments of salaries and pensions.
Under Fitch’s rating case, Oyo’s debt payback ratio is around 8x in 2027-2029. The financial profile assessment of ‘a’ factors in some volatility in the operating balance and weak secondary metrics, in particular debt service coverage below 1x and expectation of the fiscal debt burden growing towards 180% by 2029.
Oyo’s increasing operating balance in 2024 benefitted from materially higher transfers from the federal government.
“We expect transfers to remain volatile but higher than in the past, supporting operating balances at around a 20% average in our rating case of stressed oil prices below USD50 per barrel.
“We expect the state’s net Fitch-adjusted debt to increase to about NGN900 billion in a rating case of lower oil-related transfers and materially higher capex at over NGN1 trillion in the next five years versus NGN0.5 billion in the last five years” #Fitch Affirms Oyo State at ‘B’ with Stable Rating Outlook Nigerian Bond Yield Falls to 16.28% after Coupon Payment
