Why Fitch downgraded Nigeria’s IDR to “B”

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Fitch Ratings has downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+, citing the country’s precarious monetary and exchange rate policy setting and lack of fiscal buffers.

The spread of the coronavirus and tumbling oil prices could trigger a capital exodus from Africa, where governments have few tools available to battle external shocks, according to Fitch Ratings.

Top oil exporters such as Nigeria and Angola are specially vulnerable to the plunge in crude. The commodity lost about a quarter of its value on Monday after major producers disagreed on supply cuts to counter lower demand as the spread of the virus weighs on global commerce, Mahmoud Harb, a director at Fitch, said in a telephone interview

According to Fitch, the downgrade and Negative Outlook reflect the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock.

“Intensifying external pressures raise risks of disruptive macroeconomic adjustment given Nigeria’s precarious monetary and exchange rate policy setting and lack of fiscal buffers. The shock will also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession,” Fitch further said in a statement issued Monday, 6 April 2020.

Asset quality deterioration resulting from huge lending to the oil and gas industry is the gravest risk to Nigeria’s financial sector, the New York-based organisation said Wednesday.

Oil and gas accounts form the lion share of bank’s private sector lending, making up about 20% of total credit in 2019, the statistics office said two days ago.

At N219.47 billion, it posted the highest non-performing loan figure across all the sectors of the economy at the end of last year.

A statement from the agency says “operating environment risks inevitably rise in Nigeria when oil prices fall. Oil exports represent 95% of the country’s export revenue and strongly influence the broader economy. Falling oil revenue may also lead to further currency devaluation. Accordingly, the slump in oil prices raises the risk of a recession.”

Fitch envisaged that the forbearance measures taken by the apex bank would provide succour to businesses and households while stimulating credit flow across the economy.

Recently, the agency lowered the Long-Term Issuer Default Ratings (IDRs) of three Nigerian banks from ‘B+’ to ‘B-‘ and included both the Viability Ratings and the IDRs of another group of ten Nigerian banks on the Rating Watch Negative list.

Fitch stated that “the resilience of banks’ asset quality, profitability and capital during the economic downturn will influence, among other considerations, how we resolve the Rating Watches.”

Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ from ‘B+’ and placed all 10 Nigerian banks’ Viability Ratings and IDRs on Rating Watch Negative, reflecting our expectation that banks will face material pressures from the weaker operating environment in the coming months The latest Fitch report stated further, “The resilience of banks’ asset quality, profitability and capital during the economic downturn will influence, among other considerations, how we resolve the Rating Watches.

“The oil and gas sector represented about 30% of Nigerian banks’ gross loans at end-3Q19. Accordingly, loan quality is highly correlated to oil prices, as seen during previous oil price shocks in 2008-2009 and 2015-2016. Impaired loans have decreased since 2017 due to rising oil prices as well as recoveries and write-offs, but the current shock could lead to a significant increase. Any closures of oil fields due to a collapse in global oil demand would exacerbate the impact”.

Limited Buffers

“Sub-Saharan African countries have limited fiscal and external buffers in the sense that they don’t have readily available assets they can use for counter-cyclical policy purposes, such as large sovereign wealth funds,” Harb said.

Crashing oil prices pose a threat to the feeble recovery in Africa’s largest economy, Nigeria. The International Monetary Fund last month cut its growth estimate for Nigeria to 2% from 2.5% on lower oil prices.

A rigid exchange rate, dwindling foreign reserves and high dependence on foreign inflows will constrain the government’s ability to deal with lower revenues, said Harb, who is the lead analyst for Nigeria.

Fitch revised Nigeria’s rating outlook to negative in December, citing the growing risk of a disorderly adjustment of the exchange rate that could stoke financial volatility and inflation. Strategists at Paris-based Societe Generale SA see a “very elevated” risk of devaluation of the naira, which has been stable over the last two years under the management of the central bank.

Harb said the rating firm is “following developments in Nigeria and possible policy announcements, but we don’t have any set calendar for the next review of rating action.”

The Nigerian government could announce measures to weather the crisis as soon as Wednesday after a ministerial committee analyzes the impact of lower oil prices.

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Godwin Okafor is a Financial Journalist, Internet Social Entrepreneur and Founder of Naija247news Media Limited. He has over 16 years experience in financial journalism. His experience cuts across traditional and digital media. He started his journalism career at Business Day, Nigeria and founded Naija247news Media in 2010. Godwin holds a Bachelors degree in Industrial Relations and Personnel Management from the Lagos State University, Ojo, Lagos. He is an alumni of Lagos Business School and a Fellow of the University of Pennsylvania (Wharton Seminar for Business Journalists). Over the years, he has won a number of journalism awards. Godwin is the chairman of Emmerich Resources Limited, the publisher of Naija247news.

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