For Fitch, Nigeria’s Rating Remains ‘B+’, With Negative Outlook

• Predicts 1.5% growth in 2017

Obinna Chima
Fitch Ratings has revised the outlook on Nigeria’s long-term foreign and local currency Issuer Default Ratings (IDRs) to negative from stable, but affirmed the country’s IDRs at ‘B+’.
The issue ratings on Nigeria’s senior unsecured foreign currency bonds was also affirmed at ‘B+’. Similarly, the country’s ceiling was affirmed at ‘B+’ and its short-term foreign and local currency IDRs was affirmed at ‘B’.

The global ratings agency, in a statement yesterday, attributed its decision to revise the outlook on Nigeria’s long-term IDR to the country’s tight foreign exchange (FX) liquidity and low oil production.

These, according to Fitch, contributed to Nigeria’s first recession since 1994.
The Nigerian economy contracted through the first three quarters of 2016 and Fitch estimated Gross Domestic Product (GDP) growth of -1.5 per cent in 2016 as a whole.

“We expect a limited economic recovery in 2017, with growth of 1.5 per cent, well below the 2011-15 annual growth average of 4.8 per cent. The non-oil economy will continue to be constrained by tight foreign exchange liquidity.

“Inflationary pressures are high with year-on-year consumer price index (CPI) inflation increasing to 18.5 per cent in December.

“Access to foreign exchange will remain severely restricted until the Central Bank of Nigeria (CBN) can establish the credibility of the Interbank Foreign Exchange Market (IFEM) and bring down the spread between the official rate and the parallel market rates. The spot rate for the naira has settled at a range of N305-N315 per USD in the official market, while the Bureau de Change (BDC) rate depreciated to as low as N490 per USD in November 2016.

“In an effort to work with the CBN to help the parallel market rates converge with the official rate, BDC operators subsequently adopted a reference rate of N400 per USD.

“However, dollars continue to sell on the black market at rates of well above N400. The authorities have communicated a commitment to the current official exchange rate range, but the availability of hard currency at those rates is severely constrained,” Fitch added.

It noted that gross general government debt increased to an estimated 17 per cent of GDP at end-2016, from 13 per cent at end-2015. This, it however noted, was below the ‘B’ median of 56 per cent and was a support to the rating.

The country’s low revenues, according to Fitch, also pose a risk to debt sustainability.
Gross general government debt was at 281 per cent of revenues in 2016, above the ‘B’ median of 230 per cent.

Nigeria’s government debt is 77 per cent denominated in local currency, which makes it less susceptible to exchange rate risk, but the share of foreign currency debt is increasing.
“Additionally, the government faces contingent liabilities from approximately $5.1 billion in debt owed by the Nigeria National Petroleum Corporation to its joint venture partners,” the ratings agency added.

Fitch forecast that Nigeria’s general government fiscal deficit would remain broadly stable in 2017, at 3.9 per cent of GDP, just below the ‘B’ category median of 4.2 per cent.

“Nigeria is likely to experience a recovery in oil revenues, but will continue to struggle with raising non-oil revenue. Total revenue will rise to just 7.4 per cent of GDP, up from 6.2 per cent in 2016, but still below the 12.4 per cent of GDP experienced in 2011-15.

“Import and excise duties have experienced a boost from the depreciation of the naira, but corporate taxes and the VAT will continue to underperform, owing to issues with implementation and compliance.

“On the expenditure side, growing interest costs will increase current spending. Fitch forecasts the cost of debt servicing in 2017 will reach 1.4 per cent of GDP, up from an average of 1.1 per cent over the previous five years.

“The Nigerian banking sector has experienced worsening asset quality as a result of the weakening economy, problems in the oil industry, and exchange rate pressures on borrowers to service their loans,” it added.

The CBN reported that industry’s non-performing loans (NPLs) grew to 11.7 per cent of gross loans at end-June 2016, up from 5.3 per cent at end-December 2015.

According to the report, tight foreign currency liquidity also led to some Nigerian banks experiencing difficulty in meeting their trade finance obligations which were either extended or refinanced with international correspondent banks.

Nigeria’s fiscal policy was also predicated on finding sources of external funding to finance increases in capital spending. The 2017 Appropriation Bill estimates total spending of N7.3 trillion in 2017, up from the N6.1trillion contained in the 2016 budget.

“Fitch does not expect the government to fully execute the capital spending envisaged in the 2017 budget, approximately N1.8 trillion, or 1.5 per cent of GDP, but it will have to finance an overall federal government deficit of approximately N2.6 trillion.

“The authorities’ financing plan calls for borrowing between $3bn-$5 billion from external sources to finance the 2017 deficit and parts of the 2016 budget.

“The bulk of external borrowing will come from multilateral development banks and the government is also likely to go to market with a Eurobond offering of USD1bn in 1Q17.

“The Nigerian government has negotiated $10.6 billion in export credits for financing infrastructure development, which is currently awaiting parliamentary approval.

“The government’s financing plans also call for domestic issuance of approximately N1.3 billion in 2017 and use of its overdraft facility at the CBN, which the government reports is currently at N1.5 trillion.

“Nigeria’s oil sector will receive a boost from the improved security situation in the Niger Delta and Fitch expects oil production to average 2.2 million barrels per day (mbpd) in 2017.

“Oil production fell to as low as 1.5 mbpd in August, before recovering to 1.8 as of October 2016. The recovery in oil revenues and increased fiscal spending could boost the economy in 2017, if the government can improve the execution of capital expenditure.

“However, the present lull in violence and oil infrastructure attacks will only hold if the government can come to a more permanent peace settlement with Niger Delta insurgents.
“The government’s policy of import substitution has contributed to significant import compression, which allowed the current account deficit to narrow to an estimated one per cent of GDP in 2016,” it added.