Rating agency Fitch yesterday released a Sovereign Rating report on Nigeria. The agency maintained its Long-Term Foreign Currency Issuer Default Rating at B+.
A sovereign is usually a national government. Sovereign credit ratings are focused on the risk of a sovereign government (Federal Government) defaulting on its debt obligations. On a scale of 0-16, the B+ rating ranks 3.
Nigeria’s B+ ranking translates to an Issuer Default Rating (IDR) score of 3 on a scale of 0-16. An IDR rank of 16 equates to AAA rating which is the credit quality with the lowest rate of default. CCC is the lowest rating, means the default is a real possibility.
A B+ rating means the risk of default is possible, but there exists a margin of safety. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
The rating agency also stated that it expects the Central Bank of Nigeria (CBN) to maintain the current exchange rate regime. The apex bank is also expected to ease the interest rate gradually.
Despite the positive uptick in crude oil prices, growth and FX stability, the rating agency maintained a Negative Outlook regarding the country.
How does Fitch arrive at its ratings?
Fitch ranks countries using 4 key criteria.
- Structural features of the economy: These include factors that render the country vulnerable to external shocks. They include the risks posed by the financial sector, political risk and governance factors.
- Macroeconomic performance: policies and prospects, including growth prospects, economic stability, the coherence and credibility of policy.
- Public finances: consists budget balances, the structure and sustainability of public debt and fiscal financing and the likelihood of the crystallisation of contingent liabilities; and
- External finances: includes the sustainability of current account balances and capital· flows, and the level and structure of external debt (public and private)
Positives for Nigeria
The rebound in crude oil prices and production volumes has led to the country’s recovery from recession. Fitch estimates growth rates of 2.48% in 2018 and 3% in 2019. The recovery in crude oil revenue has also enhanced foreign exchange rate stability. This has also provided a boost for the non-oil sectors, especially agriculture.
Foreign reserves hit $47 billion, equating to eight months import needs, and much higher than the B, median of 4 months. The banking sector remains profitable, though economic headwinds combined with high loan concentration, have eroded asset quality and capital adequacy
Negatives for the country
Non-oil revenue remains weak, despite the economic recovery. Though government debt ratio to GDP is relatively low at 20%, FGN debt to FGN revenue is estimated at 623% as of 2017.
The government’s attempts at fiscal consolidation have been hampered by low levels of tax coverage and compliance, rigidities in Nigeria’s budgeting framework, and consistent delays in approving budgets. The 2018 budget was passed by the National assembly 8 months after receipt from the Presidency.
The general election scheduled for February 2019 could further weaken progress on the reform agenda and aggravate ongoing security challenges. Most importantly, any flare-up of insurgent activity in the oil-producing Niger Delta would hit fiscal and external revenue. In 2016 and 2017, increased insurgent activity caused a fall in oil production to a low of 1.7mbpd.
Impact of the rating
Investors may decide to halt any form of Foreign Direct Investment (FDI) till elections are concluded. Several analysts also expect Foreign Portfolio Investors (FPIs) to exit the capital market by the third quarter of 2018. This could lead to a slight decline in the equities market, which opened the year strongly. Year to date, the All Share Index is up 6.30%.
Companies and indeed the government issuing debt at this time would have to raise it a premium due to the risks highlighted.