Fitch Affirms Nigeria ‘B+’ Rating, Negative Outlook

•  Forecasts reduction in inflation to 11% by 2019
•  Manufacturing index expands for fifth month

Obinna Chima

Fitch Ratings Thursday affirmed Nigeria’s long-term foreign currency Issuer Default Rating (IDR) at ‘B+’ with a “negative outlook”.

The international rating agency in a statement explained that Nigeria’s rating was supported by its large and diversified economy, significant oil reserves, its net external creditor position, low external debt service ratio and large domestic debt market.

These, it stated, were balanced against relatively low per capita gross domestic product (GDP), an exceptionally narrow fiscal revenue base and a weak business environment.

According to Fitch, the negative outlook reflected the downside risks from rising government indebtedness, the possibility of a reversal of recent improvements in foreign currency (FX) liquidity, and a faltering of the still fragile economic recovery.

Fitch had forecast that the Nigerian economy would grow by 1.5 per cent in 2017 and 2.6 per cent in 2018, following the country’s first contraction in 25 years in 2016.
GDP growth continued to contract in 1Q17, but by less than in the previous four quarters.
“The recovery will be driven mainly by increased FX availability to the non-oil economy and fiscal stimulus, as higher oil revenue and various funding initiatives have raised the government’s ability to execute on capital spending plans.

“However, the FX market remains far from fully transparent, domestic liquidity has also become a constraint, and the growth forecast is subject to downside risks,” it noted.

The agency pointed out that at 16.1 per cent in July, inflation remained high, just as it projected that the country’s Consumer Price Index (CPI) was expected to decline to 11 per cent in 2019.

Crude oil production rose to 1.8 million barrels per day (mbpd) in July 2017, from 1.5 mbpd in December 2016, driven by the lifting of the force majeure at the Forcados export terminal and the completion of maintenance at both Forcados and the Bonga oil field.

Nevertheless, Fitch revised down its expectation of full-year average production to 1.8 mbpd, which is about equal to 2016 production.

Fitch noted that the imposition of an OPEC quota might cap Nigeria’s crude production at 1.8mbpd, which could limit the oil sector’s upside potential.

However, as it excludes condensate production, the quota should not affect Nigeria’s near-term production potential, it stated.

In April 2017, the Central Bank of Nigeria (CBN) introduced the Investors & Exporters (I&E) FX window and gradually introduced further measures to improve dollar liquidity.
It also intervenes actively to support the currency while keeping domestic liquidity conditions tight.
In addition, higher oil prices and increased portfolio and FDI inflows have enabled the CBN to increase its provision of FX liquidity to the market.

As a result, the parallel exchange rate began to converge towards the I&E rate, currently at around N360 per dollar, and foreign currency liquidity shortages eased.
Most activities now occur on the I&E window, and Fitch was of the view that the I&E rate “should now be considered the relevant exchange rate”.

Fitch also anticipated the general government fiscal deficit to rise slightly to 4.5 per cent of GDP in 2017 from 4.4 per cent in 2016.

Tax revenue in the first five months of 2017 underperformed budget expectations, as in 2015-16. The current Medium Term Expenditure Framework envisaged a combined N3.5 trillion of capital expenditures in 2017 and 2018.
In 2016, with a budget year that ran to May 2017, the government executed approximately N1.2 trillion of the N1.6 trillion forecast in the 2016 budget.

Improved financing will see a stronger execution of capital expenditure plans in 2017 and subsequent years, Fitch stated.
As oil production rises and the overall economy recovers, the ratings agency said that higher revenues will drive a narrowing of the general government deficit to 3.4 per cent in 2018.

“Nigeria’s general government debt stock is low at 17 per cent of GDP at end-2016, well below the ‘B’ median of 56 per cent of GDP, and Fitch expects only a moderate increase to 20 per cent of GDP at end-2017,” it noted.
However, Fitch stressed that the country’s low revenue presented a risk to public debt sustainability, pointing out that Nigeria’s total government debt to revenue, at 297 per cent at end-2016, was already above the ‘B’ category median of 227 per cent.

The agency, in this regard, projected an increase in the debt to revenue ratio to 325 per cent in 2017.
“The ratio is even higher at the federal government level. Nigeria’s current account surplus is expected to widen slightly by one per cent of GDP in 2017, from 0.7 per cent in 2016.

“Fitch expects exports to increase by about 30 per cent in 2017 and an additional 10 per cent in 2018, as oil production and prices increase.

“However, imports, which fell by over 30 per cent in 2016, will also rise as dollar availability increases and the non-oil economy recovers.
“The international reserves position has increased to $30.8 billion as of end-July 2017 and it will be bolstered by expected external financing flows. But part of the reserves may be encumbered in forward contracts,” Fitch noted.
It further observed that the economic contraction in 2016 and tight FX and naira liquidity weakened asset quality in the Nigerian banking sector.

“Non-performing loans rose to 12.8 per cent at end-2016, up from 5.3 per cent at end-2015.
“Rising impairment charges from bad loans have in turn led to capital adequacy ratios falling to 14.8 per cent in 2016, from 16.1 per cent at end-2015.

“The new FX window has aided FX liquidity for banks in 2017, but credit to the private sector (adjusted for FX valuation effects) is declining.

“Nigeria’s ratings are constrained by weak governance indicators, as measured by the World Bank, as well as low human development and business environment indicators and per capita income,” it stated.

But even as Fitch released its country rating on Nigeria, the country’s Purchasing Managers’ Index (PMI) rose for the fifth consecutive month to 53.6 index points in August, indicating expansion in the manufacturing sector.

The PMI is an indicator of the economic health of the manufacturing sector and is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

According to the latest report obtained on the CBN’s website, 12 of the 16 sub-sectors reported growth in the month of August in the following order: computer & electronic products; appliances and components; chemical & pharmaceutical products; textile, apparel, leather and footwear; electrical equipment; printing & related support activities; paper products; nonmetallic mineral products; food, beverage & tobacco products; furniture & related products; cement and plastics & rubber products.

But four sub-sectors contracted in the order: transportation equipment; primary metal; petroleum & coal products and fabricated metal products.

The production level index for the manufacturing sector also grew for the sixth consecutive month in August. At 57.4 points, the index indicated an increase in production at a slower rate, compared to the preceding month.
It showed that 11 of the 16 manufacturing sub-sectors recorded increases in production levels, one remained unchanged and four others declined during the month under review.

“At 52.3 points, the new orders index grew for the fifth consecutive month. Six sub-sectors reported growth, one remained unchanged while nine contracted in the review month.

“The supplier delivery time index for the manufacturing sector, at 52.0 points in August 2017, rose for the third consecutive month. Nine sub-sectors recorded improved suppliers’ delivery time, two remained unchanged while five sub-sectors recorded delayed delivery time,” the report added.