Emmanuel OchayiFitch Ratings has affirmed Nigeria’s long-term foreign currency credit default outlook at B-, lauding President Tinubu’s recent policies as the driving force behind this stability.
However, the global credit rating agency raised concerns over the proposed $10 billion forex loan intended to address forex backlogs and infuse liquidity into the system.
Fitch Ratings, in its latest rating outlook commentary on the Nigerian economy, attributed the stable outlook to notable reforms, including the removal of fuel subsidies and the introduction of a new exchange rate framework.
Nonetheless, it expressed concerns about potential backtracking on these reforms, citing a “lower degree of price discovery in the FX market than in late June” and recent revelations regarding the nation’s foreign reserve, which appear to be significantly lower than publicly acknowledged.
Examining the strengths and weaknesses impacting Nigeria’s economic rating, Fitch highlighted key factors. The agency acknowledged that Nigeria’s ‘B-‘ rating is supported by a large economy, a well-developed and liquid domestic debt market, and substantial oil and gas reserves.
However, this rating is constrained by weak governance, structurally low non-oil revenue, heavy dependence on hydrocarbons, security challenges, high inflation, low net FX reserves, and ongoing weaknesses in the exchange-rate framework.
Fitch Ratings raised concerns about the Nigerian government’s announcement to secure a $10 billion forex loan, emphasizing the lack of specific details regarding this financial endeavor. Notably, the agency questioned whether this amount includes World Bank budget support loans amounting to $1.5 billion.
READ ALSO: Fitch’s Currency Swap Estimate Rocks Nigeria’s Reserves
Fitch expressed its outlook, stating, “We forecast a broadly flat current account surplus, averaging 0.5% of GDP in 2023-2024. There is a lack of detail on a recent government announcement to raise USD10 billion of FX, including whether this includes World Bank budget support loans of USD1.5 billion. Following the sharp depreciation this year, Fitch assumes exchange-rate adjustments proceed more gradually in subsequent years.”
The credit rating agency also noted that the country’s public debt, excluding Central Bank of Nigeria loans, has a relatively extended average maturity of 9.7 years. Furthermore, Fitch highlighted how the scarcity of foreign exchange is impeding economic activities in Nigeria, hindering the flow of foreign capital.
Additionally, it emphasized that the Central Bank of Nigeria’s net foreign exchange position appears to be lower than previously understood, based on its financial statement published in August.
Regarding Nigeria’s economic growth, Fitch predicted that it will be driven by increased crude oil production, a reduction in budget deficits allowing for more capital expenditure, and non-oil revenue growth. However, it highlighted macroeconomic challenges such as high inflation, which is projected to decrease to 21.1% in 2024, and high-interest rates.
On the environmental, social, and governance (ESG) front, Fitch scored Nigeria with a ‘5’, referencing the World Bank’s assessment that the nation has weak institutional governance capacity.
The agency stated, “ESG – Governance: Nigeria has an ESG Relevance Score of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption. These 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.”
This new angle on Fitch Ratings‘ assessment of Nigeria’s economic outlook emphasizes both the positive and negative factors influencing the nation’s credit rating, shedding light on the potential consequences of the proposed forex loan and highlighting the challenges and strengths inherent in the country’s economic landscape.
Follow Us