Fitch Ratings has revised the Outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at ‘B’.
On the reason for the upgrade; information available on the firm’s website revealed that a decrease in the level of uncertainty surrounding the impact of the global pandemic on the Nigerian economy, increasing relative stability in oil prices, easing of global funding conditions, and domestic restrictions on movement have all played a key role in the new outlook.
The latest rating is based on some underlying assumptions such as; the report expects global economic trends to develop as outlined in Fitch’s most recent Global Economic Outlook, published 7 September 2020. The report also projected Brent oil prices to average USD41/barrel in 2020, USD45/barrel in 2021, and USD50/barrel in 2022. In addition, the report expects Nigeria’s oil production volume to average 1.93mbpd in 2020, 1.87mbpd in 2021, and 2mbpd in 2022, all things being equal.
According to the report, Nigeria recorded an ESG score of 5 for both political stability and rule of law, institutional, and regulatory quality. The country also recorded an ESG score of 4 in both human rights and freedom and creditors’ rights.
Recall that the key evaluation criteria for Fitch ratings of either positive or negative are usually; external finances, macroeconomic policies, and public finance.
On the external finance criterion, the report stated that; “Nigeria has navigated external liquidity pressures from the shock, through partial exchange rate adjustment combined with de facto capital flow management measures and foreign-currency (FC) restrictions, while disbursement of external official loans has supported the level of international reserves. Though external vulnerability persists from currency overvaluation and a possibly large FC demand backlog, this is adequately captured by the ‘B’ rating, in our view,”
In terms of monetary policy which is a subset of macroeconomic policies, the report highlighted that; “The Central Bank of Nigeria (CBN) continues to prioritize exchange rate stability over other policy goals, in Fitch’s view. A 6% depreciation in March of the Investor and Exporter (I&E) exchange rate, at which most FC transactions are carried out fell short of fully correcting the naira’s appreciation by about 35% in real terms, between mid-2016 and February 2020. Steep real appreciation has been driven by persistent double-digit inflation, which has offset gains from the devaluations in 2016 and 2017. Meanwhile, the CBN has achieved progress towards its stated goal of unifying the exchange rate, following a cumulative 19% two-step devaluation of the ‘official’ exchange rate, which is mostly used for the government’s and the oil sector’s FC transactions.”
On the fiscal policy and public earnings, the report added that; low fiscal revenues are a major credit weakness. GG receipts averaged 6.8% of GDP in 2015-2019, well below the current ‘B’ median of 22%. Revenues will benefit from the removal of the fuel subsidy, which has cumulatively cost the budget around 7% of 2019 GDP in 2016-2019.
The government has affirmed its firm commitment to this reform as well as its intention to continue phasing out costly electricity subsidies. However, the energy price reform faces strong opposition from labor unions, and the authorities have reinstated subsidies in the past, in response to social protests.