Nigeria’s 9% Foreign Currency Debt to GDP Remains Moderate -Fitch
- Less Financing to Short-term financing Stress
- International Reserve Projected to drop 40%
- Low fiscal Revenue weakens Debt Sustainability
Despite the risk of disorderly macroeconomic adjustment, Nigeria is less vulnerable to short term financing stress due to its deep domestic debt market, Fitch Ratings has hinted.
According to Fitch, Nigeria’s 9% foreign currency debt to the gross domestic products at 9% is moderate considering its macroeconomic fundamental of the country.
The Ratings firm said in its Sub-Saharan Africa report that the collapse in oil prices and the coronavirus shock is worsening the fiscal and external balances of sub-Saharan African oil producers.
However, Nigeria’s credit profile is more resilient as the sovereign is less vulnerable to short-term financing stress due to its deeper domestic debt market, Fitch stated.
“Nigeria faces less liquidity pressure due to its ability to raise debt on its domestic market.
“Foreign-currency debt will remain moderate at 9% of GDP despite increased recourse to official creditor loans in 2020”, the Rating agency stated.
Recalled that the Federal Government received funding from the International Monetary Policy (IMF’s) Rapid Financing Instrument (RFI) and is likely to receive support from the World Bank and African development Bank (AfDB).
“While debt-to-GDP is low in Nigeria, its low fiscal revenue weakens debt sustainability”, Fitch said.
Meanwhile, the global rating firm stated that Angola, Congo, Gabon and Nigeria’s current account deficits will not be fully covered by increased external borrowing, reducing external buffers.
Specifically, it said Congo and Gabon will face acute external liquidity strain, raising pressure on the Central African Economic and Monetary Community (CEMAC) peg to the euro.
Although, Fitch explained further that devaluation in the near term is not its base-case scenario.
“Angola will face continued pressure on its already severely devalued currency, increasing the burden of external debt service.
“Nigeria will contend with outflows of foreign portfolio investments, which could put pressure on the peg”, Fitch Rating explained.
Fitch said while it expects most countries to be able to close their financing gap with the support of official creditors, liquidity pressures will remain high through the year.
“Export receipts will drop and external support inflows will be insufficient to stem the fall in international reserves”, Fitch added.
Angola (B-/Stable), the Republic of Congo (CCC), Gabon (CCC), Nigeria (B/Negative) face a sharp deterioration of fiscal and external balances.
There is an increasing financing challenges due to the impact of the double shock of lower oil prices and the coronavirus pandemic, which underpinned recent downgrades.
For the dwindling oil prices, Fitch forecasts the Brent oil price at USD35 per barrel litre (bbl) in 2020 and USD45/bbl in 2021.
It however noted that the Sub-Saharan African oil producers entered 2020 with high debt levels and limited fiscal space.
“We expect them to post fiscal deficits between 4% and 6% of GDP in 2020”, Fitch said.
The Rating firm said this assumes lower oil prices and a contraction of oil production due to maturing oil fields, low investment and OPEC+ quotas, along with a moderate impact of measures taken to stem the pandemic.
“Government debt will soar from already high levels and exceed 115% of GDP in Angola and Congo.
“Government financing needs will rise”, Fitch said.
Explaining further, Fitch said shallow domestic markets in Angola, Gabon and Congo combined with weak public finance management for the latter two could put liquidity under stress and could threaten the timely repayment of debt.
However, it stated that governments are making Eurobond payments a priority containing the risk of defaults.
“We still expect Angola to be able to close its funding gap with financing from external official creditors in 2020 and by drawing on funds from the sovereign wealth fund, but risks are high”, it explained.
Fitch Rating explained that Congo is particularly exposed to liquidity risk given the uncertainty surrounding the renegotiation of the oil-traders’ debt and its linkages with financing.
“While liquidity risks have risen in Gabon, debt sustainability could remain stronger than for ‘CCC’ peers in our baseline scenario”, Fitch Rating stated.
Fitch stated that continued recourse to official external creditors had made all countries except Nigeria net external debtors.
In all countries, the private sector is a small net creditor while the state is a net debtor, including Nigeria.
The firm stated that the fallout from the current shock will worsen those negative positions and erode buffers.
“Only part of the additional external funding needs will be addressed by official creditors and we expect international reserves to drop over 2020 by 30%-40% in Gabon and Nigeria, 10% in Angola and to turn negative in Congo”, Fitch stated.
In CEMAC (Gabon, Congo), international reserves are pooled, allowing a country to service external financing needs even when its own imputed reserves are depleted
Fitch said reserves coverage will also reach a low level in Gabon (1.2 months of current account payments); while Angola’s flexible currency will limit the depletion of reserves
Nigeria Faces Risk of Disorderly Macro Adjustment
In Nigeria, the shock will exacerbate the overvaluation of the naira, and mode rate naira depreciation in recent months will not suffice to address deteriorating external imbalances.
Outflows of foreign portfolio investment, which will contribute to reducing international reserves to close to USD26 billion by end 2020, will aggravate external liquidity pressure.
“It is enough to cover three months of current account payments, in line with the ‘B’ median but provides little buffer given vulnerability to portfolio outflows and the overvalued exchange rate”, Fitch said.
Nigeria’s 9% Foreign Currency Debt to GDP Remain moderate – Fitch