Fitch Upgrades Kaduna, Lagos, Oyo State Ratings Outlook
Fitch Ratings has revised the outlook on the Long-Term Foreign and Local-Currency Issuer Default Ratings or credit ratings of Kaduna State, Lagos State, and Oyo state to positive from stable and affirmed the IDRs at ‘B-‘.
According to Fitch, the rating actions follow the revision of the Outlook on the Nigerian sovereign to Positive from stable. As per Fitch’s rating criteria, Nigerian states’ IDRs are capped by the sovereign’s and their Outlooks reflect those on the sovereign.
Fitch considers that the federal government’s role remains predominant in Nigerian intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states.
Therefore, rating action on the sovereign will be mirrored on Kaduna, Lagos and Oyo, as their Standalone Credit Profiles (SCP) are currently above that of the sovereign.
Fitch’s updated scenarios for Nigerian states are based on their 2023 preliminary budgetary financials and updated sovereign data.
“Our scenarios envisage steeper naira depreciation at an average N1,000-N1,500 to the US dollar across our 2024-2028 scenarios and high but declining inflation.
“These positively affect value added tax (VAT) and oil-related transfers from the federal government to states, which increased by 23% on aggregate in 2023 compared to 2022.
“However, FX depreciation also exposes states with high external debt to currency fluctuations in their debt service. We also expect materially higher capital spending driven by high inflation dynamics”.
On Kaduna debt sustainability, Fitch expects payback to remain below 18x amid weak debt service coverage and debt-to revenue ratios, weighed down by Kaduna’s material exposure to naira fluctuations as 86% of direct debt was foreign-currency-denominated at end-2023, with debt service charged from federal transfers at the source.
“We consider that Kaduna’s benefits from increases in internally-generated revenue and federal transfers, which underpin Kaduna’s operating margin at around 30% in the medium term, and our assumption that any new debt will be naira-denominated”.
On Lagos debt sustainability, Fitch expects payback ratio to remain around 5x by the end of forecast period. “Our assessment of Lagos’s debt sustainability considers high debt-to-revenue ratio at over 180% and debt service coverage just above 1x.”
Lagos’s incomparable level of internally-generated revenue to other states, at 75% of operating revenue vs national average of 25%, underpins its solid fiscal performance amid our estimate that 50% of direct debt was foreign-currency-denominated at end-2023.
On Oyo debt sustainability, Fitch expects payback to improve to around 7x, owing to higher transfers from the federal government and debt that is largely naira-denominated.
The debt sustainability assessment factors in some volatility in the operating balance, due to Oyo’s significant dependency on fluctuations in oil-related transfers, and weak secondary metrics.
The rating agency said the ‘Vulnerable’ risk profile of Nigerian states reflects a very high risk that their ability to cover debt service with operating balance may weaken unexpectedly over forecast horizon (2024-2028).
This may be due to lower-than-expected revenue, higher-than-expected expenditure, or an unexpected rise in liabilities or debt-service requirements, Fitch Ratings added. #Fitch Upgrades Kaduna, Lagos, Oyo State Ratings Outlook
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