Nigeria’s Progress on Reforms Key to Rating Prospects –Fitch
REFORMS: The Nigerian authorities’ pursuit of orthodox economic policies since the election of President Bola Tinubu in 2023, which anchored the recent USD2.2 billion Eurobond issuance, has improved prospects for the sovereign’s credit profile, says Fitch Ratings.
Nevertheless, a number of challenges remain, including ad hoc or insufficiently communicated policy implementation that has constrained investor confidence, the global rating agency added.
Changes that the central bank has introduced, including the simplification of the exchange-rate regime and tightening of monetary policy through higher interest rates, have reduced distortions in the economy and improved policy credibility.
If the electronic matching platform for all foreign-exchange (FX) transactions, launched on 2 December, is successful, it will mark another step towards a more transparent and efficient FX regime.
External buffers have benefitted from the exchange-rate reforms and associated increase in formalised FX transactions.
Gross official reserves rose to USD40.2 billion in November, equivalent to around six months of current external payments, from USD32.2 billion in April and well above the median for sovereigns rated in the ‘B’ category of 3.7 months. Gross reserves have benefited from Nigeria’s higher current-account surplus, a USD917 million foreign currency-denominated local bond issued in August, and a USD750 million disbursement from the World Bank on 20 November.
They will be further buoyed by the Eurobond issue that was successfully completed on 3 December, involving a USD700 million 6.5-year note and a USD1.5 billion 10-year note.
Nonetheless, exchange-rate policy remains hampered by a lack of transparency in several areas, including the level of net reserves.
A divergence between the official and parallel market rates has re-emerged in recent months, pointing to slower-than-expected progress on reforms and lingering FX strains.
Fiscal policy is another source of uncertainty for 2025. The government’s recent 2025-2027 Medium-Term Expenditure Framework (MTEF) set out plans to narrow the budget deficit more sharply than we had expected.
However, the MTEF’s assumptions about oil prices and production (USD 75 per barrel and 2.06 million barrels per day, including condensates) are more optimistic than Fitch’s estimates of USD 70/bbl and 1.77 mbpd, respectively.
The authorities have increased efforts to raise non-oil revenues even as oil-related revenues appear likely to fall short, but there is already a risk that they could face political challenges implementing their plans to raise the VAT rate to 10% in 2025 from 7.5% currently.
Fitch views raising fiscal revenues – and particularly less volatile non-oil revenues – as an important element of the government’s reform agenda and a key consideration for the sovereign’s credit profile, as Nigeria’s revenue/GDP is extremely low.
Even with the VAT rate increase, analysts expect Nigeria’s general government revenue/GDP to average around 10.3% in 2024-2025, compared with a median of 19% for sovereigns in the ‘B’ category.
Reducing the deficit in line with the MTEF would provide further credibility for the government’s reform agenda, but if the deficit target is missed, it may increase the pressure for further naira depreciation as well as putting upward pressure on prices and interest rates.
A deficit significantly larger than what we projected in our 1 November assessment, when we affirmed Nigeria’s rating at ‘B-’ with a Positive Outlook, could complicate the task of establishing macroeconomic stability and potentially damage policy credibility.
The reform-related improvements in Nigeria’s credit profile are captured in the Positive Outlook on the sovereign rating. If positive trends in external credit metrics are sustained, or our confidence in the durability of the broader reform agenda strengthens, upward pressure on the rating will increase. Conoil Hits Fresh 52-Week High over Fresh Rally
