Fitch Downgrades Nigeria to ‘B+’, with Stable Outlook

• FX market reporting revised as naira rises again to N281.67/$1

Obinna Chima

Fitch Ratings has downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B+’ from ‘BB-’ as well as the country’s long-term local currency IDR to ‘BB-’ from ‘BB’.

But the global rating agency, in a statement yesterday, assigned a stable outlook to the country. The issuers rating on Nigeria’s senior unsecured foreign-currency bonds was also downgraded to ‘B+’ from ‘BB-’.

Nigeria’s Country Ceiling was also revised downwards to ‘B+’ from ‘BB-’ and its Short-Term Foreign-Currency IDR affirmed at ‘B’.

The agency, with dual head offices in New York and London, pointed out that the downgrade of Nigeria’s IDRs, among others, was because its fiscal and external vulnerability had worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices.

It hinged its decision to the renewed insurgency in the Niger Delta in the first half of 2016, which has lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currency.

Fitch also forecast that Nigeria’s general government fiscal deficit was expected to grow to 4.2 per cent in 2016, after averaging 1.5 per cent between 2011-2015, before beginning to narrow in 2017.

“The government has adopted a fiscal adjustment strategy centred on raising non-oil revenue and has made some progress in raising tax revenue by improving revenue collection and improving the control over revenue raised by government departments and state-owned enterprises.

“Despite expected increases in non-oil revenue, the agency expects overall general government revenue to drop to just 5.5 per cent of Gross Domestic Product (GDP), from an average of 12 per cent in 2011-2015.

“On the expenditure side, Nigeria has also cut fuel subsidies and adopted a number of public financial management reforms that have contained the growth of current expenditure, including the move to a Treasury Single Account and the implementation of information systems that have reduced the number of ghost workers.

“Nigeria’s low level of general government debt, forecast to be 14 per cent of GDP in 2016, is well below the ‘B’ median of 53 per cent and a rating strength. However, the fall in general government revenue represents a risk to the country’s debt profile.

“Fitch estimates general government debt/revenue will rise to 259 per cent in 2016 from 181 per cent in 2015, higher than the 223 per cent median for ‘B’ rated peers.

“At end-2015, only 19 per cent of central government debt was denominated in foreign currency. Nevertheless, depreciation of the naira will increase the debt and debt service burden.

“A weak policy response to falling external revenues has led to an increase in external vulnerabilities, slower GDP growth and a widening of the current account deficit,” it added.

The Central Bank of Nigeria (CBN) recently commenced trading on the inter-bank foreign exchange market under a revised set of guidelines paving the path for a floating exchange rate.

Commenting on this, Fitch held the view that the new regime would not be fully flexible, as it would still involve a parallel market as importers of 41 items are excluded from the inter-bank market.

This would continue to hinder growth, capital inflows and investment, in Fitch’s view.

It added: “The delayed change in exchange rate policy casts some uncertainty over the authorities’ commitment to a more flexible system. The CBN’s previous exchange rate policy of managing demand for hard currency and restricting access to dollar auctions at the official FX rate resulted in a significant shortage in dollar liquidity.

“Fitch expects that some continued intervention in the FX market will reduce international reserves, which were below $27 billion before the new market began trading compared with $34 billion at end-2014.

“Fitch expects reserves to fall to 3.4 months cover of current external payments by end-2016. Fitch forecasts GDP growth to fall to 1.5 per cent in 2016, down from 2.7 per cent in the previous year, after GDP contracted by 0.4 per cent year-on-year in first quarter of 2016, stemming partly from low hard currency liquidity.

“Second quarter 2016 is likely to experience a further contraction, as the resurgence of violence in the Niger Delta has brought oil production levels down to around 1.5 million barrels per day (mbpd) in May, from approximately 2.1 mbpd in January.

“Nigeria’s ‘B+’ IDRs also reflect the following key rating drivers: In the medium to long term, the move to a more flexible exchange rate mechanism, if implemented effectively, is likely to be supportive of economic growth and economic rebalancing in the face of the drop in oil revenues.

“The accompanying depreciation of the naira will also increase foreign currency denominated fiscal revenue in naira terms. However, the positive effects of naira devaluation will take some time to fully materialise and, in the meantime, Nigeria will be vulnerable to a number of downside risks.

“Fitch expects the current account deficit to widen to 3.3 per cent of GDP in 2016, from 2.6 per cent in 2015 and compared with the median of ‘BB’ rated peers at two per cent.

“Increased external borrowing will reduce Nigeria’s position as a small net external creditor, although this will remain stronger than the ‘B’ range median.

“The authorities’ move to liberalise fuel prices has allowed more supply to come to market, but together with FX restrictions it has led to a rise in inflation to 15.6 per cent in May.

“Inflationary pressures from the depreciation of the naira will be partly balanced by improved foreign currency access which should reduce supply constraints. Fitch forecasts inflation to end the year at lower than 12 per cent.

“Our base case for Nigerian banks is that regulatory total capital ratios will not decline significantly due to the effective devaluation.

“Any impact will be offset by still strong profitability and high levels of internal capital generation. The new FX regime crucially also provides access to US dollars for the banks to meet demand and their internal and external obligations.

“Political risks include the insurgency by Boko Haram and ethnic and sectarian tensions in the Niger Delta and Biafra regions.”

Commenting on the rating by Fitch, Managing Director/Chief Economist, Africa, Standard Chartered Bank, Razia Khan, in a note to THISDAY yesterday described the rating action as a catch-up with the ratings already assigned to Nigeria by the other rating agencies, saying any market impact was likely to be blunted.

According to her, of much more relevance was Nigeria’s recent move to currency flexibility, adding that although the new FX regime was still being tested, over time – if sustained – it was expected to be positive for Nigeria’s credit rating.

“A more flexible FX regime should relieve the pressure on growth, with the real economy no longer needing to bear the full burden of adjustment to the oil price shock.

“Although this is not immediately evident at the outset, currency flexibility should also mean that Nigeria’s FX reserves are eventually better protected, and that access to external financing is enhanced.

“Both are important factors that will allow Nigeria to adjust more favourably to weaker oil prices.

“Meaningfully, the adjustment in the FX rate should provide an immediate boost to fiscal revenue. Both oil revenue and customs receipts should see an immediate uplift, helping to offset partially the impact of more subdued oil output.

“In our view, the key threat to Nigeria’s creditworthiness at the moment would be a reversal of any of the key reforms – especially the transparency effort and the adoption of currency flexibility.

“The risk of a prolonged shortfall in oil production related to Niger Delta militancy is also significant, although over time sustained structural reforms might lessen its overall impact,” she added.

Meanwhile, the FMDQ yesterday announced a revision of the NIFEX methodology and publication standard. The decision would become effective today.

The FMDQ in a notice on its website announced “the revision of the NIFEX methodology and publication in line with the principles for the financial benchmarks of the International Organisation of Securities Commission (IOSCO), effective June 24, 2016”.

During currency trading, the naira gained N1.13 or 0.4 per cent to close at N281.67 to a dollar yesterday, stronger than the N282.80 on Wednesday.

Also, as a result of the move by the central bank to strengthen liquidity in the market, the overnight tenor of the Nigeria Interbank Offered Rate (NIBOR) dropped to 34.42 per cent yesterday, from 68.50 per cent on Wednesday.