Nigeria’s Stable Outlook: We Are Less Optimistic than Fitch -Afrinvest
Afrinvest, a leading investment banking firm headquartered in Lagos is a little less optimistic than Fitch Ratings stable outlook assessment of the Nigeria’s external and fiscal risks.
The firm revealed its position in its macroeconomic note this week, saying Fitch Ratings may be over optimistic.
During the week, Fitch revised Nigeria’s outlook from negative to stable as the ratings firm affirmed ‘B’ for the sovereign.
However, in its macroeconomic review, Afrinvest thinks those factors that drove the previous downgrade to negative still persists, if not worse.
Fitch had downgraded Nigeria’s long-term foreign-currency issuer default rating (IDR) to ‘B’ from ‘B+’ with a negative outlook in April 2020 due to COVID-19 pressures.
In its recent review, Fitch Ratings revised the outlook to stable, citing reduced uncertainties, stable oil prices and the reopening of the economy.
The rating action was also largely influenced by CBN’s management of external liquidity pressures through partial exchange rate adjustment, capital controls, FX restrictions and the rise in external reserves following the disbursement of IMF’s $3.4 billion Rapid Financing Instrument (RFI).
However, the rating agency cited the persistence of external vulnerabilities due to an overvaluation of the naira and a large FX demand backlog.
“The revision to the rating is surprising given that severe external and fiscal financing pressures persist”, Afrinvest said in the note.
While Fitch alluded to stable oil prices, Afrinvest stated that the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices.
Explaining its position, Afrinvest said the slow and uneven recovery in global oil demand is also expected to linger till the end of 2021.
This implies that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geo-political tensions.
Beyond oil & gas exports which only accounts for 35.8% of current account receipts, Afrinvest stated that inflows from foreign investment and remittances are expected to sharply reduce.
It noted that external reserve settled at $36.2 billion despite inflows from International Monetary Fund, still down 15.5% year to date.
Afrinvest said the adjustments to the official exchange rate from ₦307.0$1.0 to ₦380.0/$1.0 in August and the slight weakness in the National Autonomous Foreign Exchange rate to ₦380.0/$1.0 from ₦360.0/$1.0 are too weak to correct the shock from weak oil prices.
The firm also factored the economic impacts of falling remittances and reduced capital flows into the equation.
Afrinvest said the restrictions on FX demand and the existing FX demand backlog have brought about a significant premium of around ₦79.0 in the parallel market.
Analysts explained that they now consider parallel market to be a more market-reflective segment.
The implication of the measures the Central Bank of Nigeria has adopted appear to be understated by Fitch, Afrinvest pinpointed; despite citing the impacts in the form of poor investor confidence, slow growth recovery and trade weakness.
With foreign investors still holding around $10.0 billion of Open Market Operations bills as at August 2020 according to Fitch, analysts believe there remains severe risks to the external reserves and the currency.
This is so given weak prospects for the recovery of oil and non-oil sources of FX supply.
With debt service to revenue at 72.2% between January and May 2020, Afrinvest emphatically stated that the FG’s fiscal position is under pressure.
The investment firm considered this a more prominent debt sustainability risk than Nigeria’s low debt to GDP ratio of around 20.4%, since revenue collection has been underwhelming and below peers at less than 10.0% of GDP.
“While we believe the subsequent adjustment to the official exchange rate to ₦380.0/$1.0 in August, removal of energy subsidies and the recovery in oil prices since Q2:2020 would have supported revenues in Q3:2020, we suspect that this would not be enough to significantly close the fiscal funding gap”, Afrinvest explained.
Accordingly, the firm stated that it is little less optimistic than Fitch that recent developments have lowered Nigeria’s external and fiscal risks.
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Nigeria’s Stable Outlook: We Are Less Optimistic than Fitch -Afrinvest
