Fitch Ratings has upgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Kaduna, Kogi, Lagos, and Oyo states from ‘B-’ to ‘B’.
According to information on the agency’s website, the outlook for all four states remains Stable.
The agency noted that rating action follows the upgrade of Nigeria’s sovereign rating to ‘B’ from ‘B-’ on April 11, 2025, reflecting improved macroeconomic stability and policy reforms.
In line with Fitch’s rating criteria, the agency has mirrored the sovereign upgrade in the affected states, given the predominant role of the federal government in Nigeria’s intergovernmental fiscal system.
“We consider the federal government’s role is predominant in intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states. Therefore, the upgrade of sovereign IDRs is mirrored in the upgrade of those of Kaduna, Kogi, Lagos, and Oyo, as their Standalone Credit Profiles (SCPs) align with or are above the ratings of Nigeria,” Fitch noted.
Key Drivers of the Upgrade
Fitch’s revised projections for Kaduna, Kogi, Lagos, and Oyo states take into account several key factors. These include a steeper depreciation of the naira, which is expected to exceed N1,500 to the US dollar between 2024 and 2028, and a trend of high but gradually declining inflation.
Additionally, the agency noted an increase of over 20% in federal VAT and oil-related transfers to the states in 2024, which supports their financial positions.
However, Fitch cautioned that the weakness of the naira heightens the debt service risks for states carrying significant external debt.
State-by-State Analysis
Kaduna State (‘bb’):
At the end of 2023, 86% of Kaduna State’s direct debt was denominated in foreign currencies, leaving it highly exposed to currency risks, the agency noted.
Fitch expects Kaduna’s payback ratio to remain at around 18 times, reflecting weak debt service coverage and a high debt-to-revenue ratio.
Despite these challenges, Flitch said the state benefits from strong operating margins of approximately 40%, driven by steady growth in internally generated revenue (IGR) and increased federal transfers.
Kogi State (‘bb’):
Flitch noted that Kogi State’s debt profile reflects a mix of domestic and foreign borrowings, largely used to finance its ambitious capital expenditure projects.
Fitch projects the state’s payback ratio to remain around 20 times over the medium term, indicating significant pressure on its ability to service debt.
The agency said the state’s fiscal performance, however, is marked by high volatility due to its heavy dependence on oil-related transfers from the federal government, making its budget balances particularly sensitive to fluctuations in global oil prices.
Lagos State (‘aa’):
By the end of 2023, 50% of Lagos State’s direct debt was denominated in foreign currencies, highlighting a notable exposure to currency fluctuations, Flitch notes.
Despite this, Fitch projects Lagos’s payback ratio to remain strong at around 5 times by the end of 2028. The state’s fiscal resilience is underpinned by its exceptional internally generated revenue (IGR), which accounts for 75% of its total operating revenue, far exceeding the national average of 25%. Supported by this strong revenue base, Lagos is also expected to record a budget surplus in 2024.
Oyo State (‘a’):
Oyo State’s debt profile is primarily denominated in local currency, which helps to reduce its exposure to foreign exchange risks.
Fitch expects the state’s payback ratio to remain below 9 times, supported by an increase in federal transfers.
- However, volatility remains a concern due to Oyo’s heavy reliance on oil-related revenues and its weaker secondary fiscal metrics..
- Lagos State holds a Standalone Credit Profile (SCP) of ‘b+’, which reflects a combination of a ‘Vulnerable’ risk profile and a financial profile assessed at the upper end of the ‘aa’ category.
However, its Issuer Default Ratings (IDRs) are capped by Nigeria’s sovereign rating. Meanwhile, Kaduna, Kogi, and Oyo states each maintain ‘b’ SCPs, characterized by vulnerable risk profiles and financial metrics that fall between the ‘a’ and ‘bb’ categories.
Environmental, Social, and Governance (ESG) Risks
Kaduna, Kogi, and Oyo states each have an ESG Relevance Score of 4 for Biodiversity and Natural Resource Management, reflecting their heavy dependence on oil revenues to support financial operations. Kaduna, however, faces additional ESG-related challenges.
These include issues with Energy Management, marked by low efficiency and a high reliance on the national grid; concerns around Human Rights and Political Freedoms, as ongoing ethnic conflicts continue to impact civil rights; and weaknesses in Human Development, with the state’s Human Development Index falling below the national average.
Kaduna also struggles with Population and Demographics, as it records below-average socio-economic indicators and a significant proportion of its residents living below the poverty line, Flitch noted.
