Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary.Thank you for reading this post, don't forget to subscribe!
Key Rating Drivers
Fundamental Strengths and Weaknesses: Nigeria’s rating is supported by a favourable public debt/GDP ratio, a large economy, a developed and liquid domestic debt market, and large oil and gas reserves. The 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.
Stable Rating Outlook: The Stable Outlook is supported by our 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 we think the domestic debt market has sufficient capacity to compensate for severely constrained access to Eurobond financing. However, higher debt servicing costs, and inflationary constraints to continuing deficit monetisation present risks to public finances.
Moderate Reform Expected: 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.
Partial Oil Production Recovery: 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 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.
Exchange-Rate Distortions: 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, 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.
Falling International Reserves: Fitch projects the current account balance, which improved 1pp in 2022 to a surplus of 0.2% of GDP, worsens 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.
Oil Subsidies Weigh on Fiscal Deficit: The general government deficit narrowed 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 near 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.
Constrained Financing Conditions, Liquid Banks: 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 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).
Still-Low But Rising Public Debt: 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%).
Very High Interest to Revenue: 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%.
Inflationary Challenge, Fairly Loose Policy: Nigeria’s already structurally high inflation rose to an average 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.
Moderate GDP Growth: Fitch 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%.
ESG – Governance: Nigeria has an ESG Relevance Score (ESG.RS) of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Nigeria has a low WBGI ranking at the 17th percentile, reflecting weak institutional capacity, uneven application of the rule of law and a high level of corruption.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
– External Finances: Greater risk of marked intensification of external liquidity stress and more rapid decline in FX reserves, for example, due to lower oil prices, severely constrained external financing sources, or failure to address policy weakness in the exchange-rate framework that contributes to capital outflows.
– Public Finances: Higher risk of debt servicing difficulties, for example, stemming from a widening fiscal deficit, further increase in the cost of, and weaker demand for, domestic government debt, and ongoing highly constrained access to Eurobond financing.
– Macro: Greater macro-instability in the form of more entrenched high inflation or high GDP growth volatility, potentially due to further central bank fiscal financing, loose monetary policy settings, unanchored inflation expectations, and more severe foreign-currency shortages in the economy.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
– External Finances: Reduction in external vulnerabilities, for example, due to a durable recovery in international reserves, easing of domestic foreign-currency supply constraints or sustained current account surpluses.
-Public Finances: Structural improvement in public finances, potentially arising from a sustained increase in oil revenue, implementation of subsidy reform and a credible path to stronger mobilisation of domestic non-oil revenue.
-Macro: Improved credibility and consistency in monetary policymaking and FX management, resulting in a sustained reduction of inflation and distortions in the FX market
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch’s proprietary SRM assigns Nigeria a score equivalent to a rating of ‘B-‘ on the Long-Term Foreign-Currency IDR scale.
Our sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
References for Substantially Material Source Cited as Key Driver Of Rating
The principal sources of information used in the analysis are described in the Applicable Criteria.
Nigeria does not publish consolidated fiscal data on a general government basis, which complicates our assessment of fiscal performance. Fitch is able to produce its own estimates for general government fiscal metrics based on disaggregated data on federal, state and local government revenue, spending and debt published by the NNPC, the CBN, the Debt Management Office, the Budget Office of the Federation and the National Bureau of Statistics. Fitch’s estimates are broadly consistent with and comparable to the data used for other sovereigns. The data used were deemed sufficient for Fitch’s rating purposes because we expect that the margin of error related to the estimates would not be material to the rating analysis.
Nigeria has an ESG.RS Score of ‘5’ for Political Stability and Rights as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Nigeria has an ESG.RS of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicators, this has a negative impact on the credit profile.
Nigeria has an ESG.RS of ‘4’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Nigeria has an ESG.RS of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Nigeria, as for all sovereigns. As Nigeria has a fairly recent restructuring of public debt in, this has a negative impact on the credit profile.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.