Fitch Upgrades Kaduna, Lagos, Kogi, Oyo Credit Ratings
Fitch Ratings has upgraded Kaduna, Lagos, Kogi, and Oyo states long-term foreign- and local-currency issuer default ratings (IDRs) or credit ratings to ‘B’ from ‘B-‘ with a stable outlook. In a rating note, Fitch said the upgrade of Kaduna, Kogi, Lagos, and Oyo follows the upgrade of Nigeria to ‘B.’.
“We consider the federal government’s role to be predominant in intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states”.
Fitch’s revised rating case on these four states includes updated macro data. They envisage steeper naira depreciation, to more than 1,500 to the US dollar across 2024-2028, and high, but declining, inflation.
These positively affect the federal government’s allocation of value-added tax (VAT) and oil-related transfers to states, which increased by over 20% in aggregate in 2024. However, currency depreciation exposes states with high external debt to fluctuations in their debt service, the rating note highlighted.
Fitch analysts expect Kaduna’s payback to remain at 18x amid weak debt service coverage and a high debt-to-revenue ratio, weighed down by a material exposure to naira fluctuations.
This is because 86% of its direct debt was denominated in foreign currencies at the end of 2023. Kaduna’s overall financial profile benefits from increases in internally generated revenue and federal transfers, which underpin its operating margin at about 40% over the medium term.
“We assume that any new debt will be denominated in local currency.” Fitch analysts expect Kogi’s payback ratio to stay at about 20x over the medium term. Oil-related transfers from the federal government support the state’s fiscal performance but also result in volatility in the operating balance due to the commodity’s price fluctuations.
The payback ratio considers the effect of naira depreciation and new borrowings in domestic and foreign currencies to support its large capex plan. At the same time, Fitch analysts expect Lagos’s payback ratio to remain at around 5x by the end of 2028.
Lagos’s incomparable level of internally generated revenue compared to other states and dynamic tax proceeds underpin its solid fiscal performance, with a budgetary surplus expected in 2024.
Fitch analysts said this balances its high proportion of direct debt in foreign currencies, its high debt-to-revenue ratio of over 200%, and debt service coverage of above 1x.
Oyo’s payback is expected to stay below 9x, owing to higher transfers from the federal government and as its debt is mostly denominated in naira. “We factor volatility into the operating balance due to the state’s large dependence on volatile oil-related transfers and its weak secondary metrics”. Pension Fund Assets Grows to N23.366 Trillion
