Fitch Ratings has assigned Cross River State a ‘B-‘ Long-Term Foreign- and Local-Currency Issuer Default Rating (IDR) and an ‘AA-(nga)’ National Long-Term Rating, noting the state’s reliance on federal transfers and its growing debt burden.
In an official announcement, the ratings agency cited concerns over the state’s ambitious capital expenditure (CapEx) plans, exposure to foreign currency debt, and rising operating costs as key drivers of its fiscal challenges.
Also, Fitch projects that Cross River’s net adjusted debt will increase significantly, reaching approximately N880 billion by 2028. This projection accounts for the impact of a weakened naira on the state’s foreign currency debt, which constitutes 50% of its adjusted debt as of the end of 2023.
“We expect Cross River’s net Fitch-adjusted debt to significantly increase to around NGN880 billion in our rating case of lower oil-related transfers. The increased debt includes the depreciation of Cross River’s FX debt (50% of adjusted debt at end-2023), under a scenario in which the NGN/USD exchange rate moves to NGN1,600/USD-NGN1,800/USD and Fitch’s assumption of new borrowings to fund the state’s ambitious NGN0.6 trillion capex plan in the next five years,” the agency said.
The agency predicts an exchange rate fluctuation between N1,600/USD and N1,800/USD alongside new borrowings intended to finance the state’s N600 billion CapEx plan over the next five years.
“Under our rating case of economic downturn, we forecast Cross River’s debt payback ratio (net Fitch-adjusted debt/operating balance) at 14x on average in 2026-2028 (3.3x in 2023; 7.5x in 2022), with some volatility linked to changes in oil prices. We expect debt/operating revenue to increase to above 400% and weak debt service coverage by the operating balance,” Fitch stated.
Revenue Sources: Federal Transfers, VAT, and Internally Generated Revenue (IGR)
Cross River’s fiscal performance saw an improvement in 2023, supported by increased collections from Value Added Tax (VAT) and statutory allocations. Operating margins ranged between 40% and 65%, driven primarily by federal revenue.
Fitch noted that although short-term revenue could benefit from oil prices and naira depreciation, a potential drop in oil prices below $50 per barrel would significantly erode the state’s operating balance, unless offset by higher VAT collections and IGR.
The agency highlighted an 86% growth in IGR in 2023 compared to 2022, signaling potential for expansion if tax compliance measures are enhanced. However, challenges include a large informal economy, predominantly reliant on agriculture, and the low income levels of the population.
Debt Structure and Borrowing Risks
The state’s debt portfolio remains vulnerable due to its exposure to foreign currency fluctuations and the absence of restrictions on borrowing limits, maturities, or interest rates for Nigerian states.
According to Fitch, Cross River’s debt comprises:
- 31% Domestic debt involving local counterparties and federal government-sponsored facilities.
- 18% Contractors and pension arrears, included in the adjusted debt calculation.
- 50% External debt, which almost doubled in 2023 due to the steep depreciation of the naira.
Fitch emphasized, “Cross River’s external and intergovernmental debt is largely serviced by deductions from statutory allocation, which limits flexibility.”
Revenue and Tax Base Expansion
Cross River’s revenue sustainability hinges on its ability to diversify its tax base and enforce compliance. The state’s primary fiscal revenue source is pay-as-you-earn (PAYE) taxes, for which tax rates are federally set. Other IGR sources, such as fees, remain inconsistent but show growth potential.
“The ability to expand the tax base is constrained by the large informal economy and low-income levels of the population,” Fitch noted.
