Nigeria: Fitch Affirms Nigeria at ‘B-‘ with Stable Outlook

Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook. In the rating note released today, it stated that Nigeria’s rating is supported by a favourable public debt-to-GDP ratio, a large economy, a developed and liquid domestic debt market, and large oil and gas reserves.

However, the rating agency noted that the sovereign rating is constrained by weak governance, security challenges, high inflation, structurally very low non-oil revenue, high hydrocarbon dependence, and weakness in the exchange-rate framework.

The stable outlook is supported by Fitch’s base-case expectation of moderate reform progress under the new administration, including the phased elimination of oil subsidies and some more exchange-rate flexibility, although there is sizeable uncertainty around the policy agenda.

Oil production has also picked up from last year’s lows and Fitch analysts think the domestic debt market has sufficient capacity to compensate for severely constrained access to Eurobond financing.

However, the rating note stated that the country’s higher debt servicing costs, and inflationary constraints to continuing deficit monetisation present risks to public finances.

“We expect a somewhat more technocratic, market-friendly, and reformist government under the new president, Bola Tinubu of the ruling All Progressives Congress, who won March’s general election, with 37% of the vote, on a 27% turnout”.

However, significant reform momentum is far from assured given this weak mandate, lack of a majority in the House of Representatives, and social pressures against important reforms.

“We do not anticipate that the numerous legal challenges will lead to the election result being overturned”. Oil production including condensates fell to a low of 1.1 mbpd in July 2022, averaging 1.5 mbpd for the full year, from 2.1 in 2019, due to oil theft, pipeline vandalism, ageing infrastructure and low investment.

Production recovered to 1.6 million barrel per day (mbpd) in March, helped by resumption of the Forcardos terminal and Trans-Niger pipeline, and a stepping-up of onshore surveillance to tackle theft.

Fitch forecasts a further increase to 1.75 mbpd in 2024. There will be a marked increase in refining capacity in 2023 when the Dangote plant commences operations (with an eventual 0.65 mbpd capacity), reducing import costs.

There remains extensive use of foreign exchange (FX) and import restrictions to manage external pressures, with multiple exchange-rate windows at the Central Bank of Nigeria (CBN), and limited flexibility of the main “I&E” rate.

This results in severe foreign-currency shortages for the private sector, a large divergence with the parallel unofficial exchange rate (NGN740/USD versus NGN461/USD) and has contributed to weak foreign investment and sizeable private-sector capital outflows over the past year. International reserves fell to USD35.3 billion in April, from USD39.2 billion in July 2022.

Fitch projects the current account balance, which improved by 1 percentage point (pp) in 2022 to a surplus of 0.2% of GDP, worsening to a deficit of 0.8% of GDP in 2024, on less favourable terms of trade.

Together with weak capital inflows, this underpins our forecast for FX reserves to fall to 4.0 months of CXP at end-2024, from 4.9 at end-2022. This is still well above the projected ‘B’ median of 3.3 months, although Fitch estimates around 30% of Nigeria’s reserves are made up of FX swaps.

Near-term sovereign external debt service remains manageable, averaging USD4.2 billion in 2023-2024.

The general government deficit narrowed to an estimated 0.4pp in 2022 to 5.5% of GDP, with the benefit of high oil prices and strong non-oil revenue growth eroded by weak oil production, expensive oil subsidies of nearly 2pp, and a 0.2pp rise in debt interest.

Under the enacted 2023 budget, the fuel subsidy expires in June, but the National Economic Council has suspended this deadline and Fitch assumes a phased removal extending into 2024.

“We forecast the deficit narrows marginally to 5.4% of GDP in 2023 and 5.2% in 2024, also reflecting the impact of reform to moderately boost non-tax revenue”.

Fitch assumes nearly three-quarters of financing in 2023 will be domestically sourced. More than 40% of planned external financing comprises official sector disbursements, potentially with the use of syndicated loans and ECA-backed credit for the remainder.

“We expect lower recourse to CBN financing than in 2022, although there is a risk from weaker-than-expected demand from the domestic banking sector, despite its ample liquidity and strong deposit growth (21% in 2022)”.

General government debt/GDP rose 2pp in 2022 to 35.1%, but is still well below the ‘B’ median of 59%. Our calculations include government loans from the CBN, which rose sharply to NGN27.1 trillion (13.4% of GDP) at end-2022 from NGN18.5 trillion at end-2021.

Fitch projects general government debt increases to 40.5% of GDP at end-2024, as sizeable deficits and naira depreciation outweigh support from a high GDP deflator (averaging 13%).

Nigeria’s public debt (excluding CBN loans) has a fairly long average maturity of 9.7 years, and 60% is local-currency denominated (‘B’ median 36%).

However, structurally extremely low revenue/GDP (near 7%) largely account for a general government interest/revenue ratio that is one of the highest of Fitch-rated sovereigns at 42%.

The Senate and House of Representatives have approved measures to securitise NGN23 trillion of the CBN loans over 40 years, with a three-year grace period on principal, at a lower interest rate, of 9%.

Nigeria’s already structurally high inflation rose to an average of 21.9% in 1Q23, from 15.7% in 1Q22, with core inflation of 19.3%. High food price inflation of 24%, naira depreciation particularly in the parallel market, and deficit monetisation add to pressures.

Fitch projects inflation averages 19.7% in 2023 and 15.4% in 2024 well above the respective ‘B’ medians of 6.4% and 4.9%. CBN raised the policy interest rate by 650bp in the year to April, to 18%, tightened reserve requirements, and phased out credit support schemes, but liquidity and credit growth remain strong.

The rating agency forecasts GDP growth of 2.8% in 2023 from 3.3% in 2022, driven by the services sector and higher oil production, offsetting weakness in agriculture, and a drag in 1Q23 from the disorderly process of exchanging naira notes.

The deadline for completing this exchange of larger-denomination notes, supporting formalisation, bank deposits, and financial inclusion, was extended to end-2023, reducing risks of further disruption. We project GDP growth of 2.9% in 2024, close to our assessment of Nigeria’s trend rate, and the ‘B’ median of 3.1%.