Fitch Revises Nigeria’s Outlook From Stable To Positive

Fitch, the globally recognized credit rating agency, has revised Nigeria’s long-term credit default rating from stable to positive.

Gatekeepers News reports that this positive revision is attributed to the country’s significant reforms in the foreign exchange market, oil industry, and monetary policy over the last year.

These reforms have led to an improvement in macroeconomic stability and credibility.

The agency praised the Federal Government for taking necessary steps to bring about these reforms, including adjustments in exchange rate and monetary policy frameworks, reduction in fuel subsidies, improved collaboration between the fiscal and monetary side of the economy, and reduction in Ways and Means borrowing.

“Fitch Ratings has revised the Outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable, and affirmed the IDR at ‘B-”

“The Positive Outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.”

“The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizeable inflows to the official foreign exchange (FX) market. Nevertheless, we see significant short-term challenges, notably, inflation is high, and the FX market has yet to stabilise, and the durability of the commitment to reform is to be tested.”

The Central Bank of Nigeria (CBN) was also commended for its role in eliminating distortions in the foreign exchange market and attracting foreign inflows through monetary policy tightening.

While Fitch acknowledged the progress made in the Nigerian economy, it also highlighted concerns over continued volatility in the forex market, high inflation levels, and opacity regarding the true size of the country’s foreign reserves.

In addition, the report also emphasized the need to improve non-oil revenues, increase oil production levels, and reduce high interest payments occasioned by currency depreciation and increased borrowing rates.

The report partly reads: “The CBN has stepped up efforts to reform the monetary and exchange rate framework following last year’s unification of the multiple exchange rate windows, and the large differential between the official and parallel market rates has collapsed. Average daily FX turnover at the official FX window has risen sharply from 2H23, and there has been clearance of $4.5 billion of the backlog of unpaid FX forwards (the validity of the outstanding $2.2 billion is being assessed by CBN), and weekly sales of FC to bureaux de changes (BDCs) have resumed (having been suspended since 2021).

“Greater formalisation of FX activity and monetary policy tightening has contributed to a significant rise in foreign portfolio investment inflows, and a fast appreciation of the naira at the official FX window, following the 71 per cent post-liberalisation depreciation between June 2023 and mid-March 2024, although the exchange rate remains volatile. However, Fitch views continued lack of clarity in the size of net FX reserves as a constraint on the sovereign’s credit profile.”

It anticipated increases in the CBN monetary policy rate in the second half of 2024, following the 600bp hike to 24.75 per cent since February 2024, alongside tightening of reserve requirements and, “strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR.”

“We project inflation, which rose to 33.2 per cent year-on-year in March due partly to exchange rate pass-through and rising food prices, to average 26.3 per cent in 2024 and 18.2 per cent in 2025, still well above our projected ‘B’ median of 4.5 per cent.“

The budget deficit is projected to widen 0.3 percentage point (pp) in 2024 to 4.5 per cent of GDP (but 0.5pp lower than we projected at our last review).

“This is due to improving non-oil revenue and partial fuel subsidy removal being offset by underperformance in oil profits from Nigerian National Petroleum Corporation Limited (despite a potential improvement in oil production) and higher payments for debt servicing, personnel and capex.

“We project a two pp rise in general government (GG) revenue/GDP from 2023 to 2025 to 9.6 per cent, helped by increased mobilisation of non-oil tax revenue, to narrow the budget deficit to 4.1 per cent in 2025. Nevertheless, the GG revenue/GDP ratio would remain one of the lowest of Fitch-rated sovereigns. The government has sharply reduced recourse to its CBN ‘Ways and Means’ overdraft this year, and banks’ healthy foreign currency (FC) liquidity and strong demand for government securities support domestic financing capacity.

“We expect oil refining capacity to increase in 2024-2025 as the Dangote plant ramps up, with an eventual 0.65 mbpd capacity. This will reduce transportation costs and lower refined oil imports, which should ease FX demand. We anticipate an increase in crude oil production (including condensates) in 2024-2025, averaging 1.75 mbpd, from 1.58 mbpd in 2023, helped by improved onshore surveillance, but this is still well below the 2019 level, reflecting underinvestment in the sector and production outages.”

It noted that: “Nigeria’s rating is supported by its large economy, developed and liquid domestic debt market, and large oil and gas reserves. It is constrained by weak governance indicators relative to peers’, high hydrocarbon dependence, limited crude oil production capacity, weak net FX reserves, high inflation, ongoing security challenges, and structurally low, albeit improving, non-oil revenue.”