Debt Distress Rising in Sub-Saharan Africa, says Fitch

Fitch Ratings Estimates 31% Debt to GDP for Nigeria

Fitch Ratings has projected 30.7% debt to gross domestic product (GDP) for Nigeria in 2020, the data is contained in a special report on Sub-Saharan Africa.

That means for every $100 slice of the economy, more than $30 could be used to pay off the country’s creditors.

This ratio will worsen in 2021 according to Fitch Ratings report as it projected debt to the GDP of 21.2%.Nigeria’s Debt to GDP Debt to GDP for Nigeria

This is due to rising debt profile of the nation without commensurate increase in revenues from both oil and non-oil sectors.

Already, the debt to revenue has been pressured by the coronavirus pandemic that ushered in economic lockdown.

While the need to borrow is quite understandable, FG is doing close to nothing to diversify the country’s earnings, analysts told MarketForces.

The downgrade to ‘B’ from ‘B+’ and the negative outlook reflect the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock, Fitch explained.

However, it stated that intensifying external pressures raise risks of disruptive macroeconomic adjustment given nation’s precarious monetary and exchange-rate policy setting and lack of fiscal buffers.

“The shock will also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession”, Fitch said.

Severe Impact of Oil Shock:

Fitch explained that the plunge in oil prices and production cuts under the most recent OPEC+ agreement highlights Nigeria’s high dependence on the oil sector.

Hydrocarbon revenue representing 57% of current-account receipts and nearly half of fiscal revenue over the past three years, it added.

The ratings firm said in its view, this shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria (CBN) will not suffice to address deteriorating external imbalances.

Vulnerability to Portfolio Outflows:

Fitch remarked that Nigeria is vulnerable to capital outflows given the sizeable stock of portfolio investments in short-term naira debt securities.

This is equivalent to USD 27.7 billion or 6.9% of GDP at end-2019 and representing around 72% of foreign currency (FC) reserves at the time.

“Of these liabilities, USD 14.7 billion was in non-resident investments in the CBN’s open-market operation bills.

Nigeria’s Total Debt Profile Now N25.7 Trillion – DMO

“Portfolio holdings fell by 46% in the first quarter of 2020 according to the IMF but FC reserves dropped by just USD 5 billion between end-December and end-April despite only limited naira depreciation.

“This reflects tighter FC access, which has contained capital outflows temporarily, but the build-up of pent-up FC demand may increase the risk of a disruptive future exchange-rate adjustment”, the firm explained.

Weak Fiscal Revenues:

In the report, the ratings firm stated that low fiscal revenue presents a major challenge to debt sustainability.

Fitch said gross general debt will edge up to 520% of revenue (FGN: 1382%) in 2021 from 348% (FGN: 684%) in 2019, widening the gap with the historical ‘B’ median of 214%.

“We expect the government to secure USD 5.4 billion from the IMF and other multilateral creditors covering 21% of its funding needs in 2020”, it explained.

The relatively developed financial sector underpins the sovereign’s financing flexibility.

Deep Economic Recession:

The Ratings firm said the pandemic shock will push the Nigerian economy into its deepest recession since the early 1980s.

A weak operating environment and high exposure to the oil sector could lead to further deterioration in bank asset quality, Fitch stated.

Fitch Ratings Estimates 31% Debt to GDP for Nigeria

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