After Moody’s, Fitch Downgrades Nigeria’s Credit Rating

* Says decision based on rising fuel subsidy, mounting debts

Emmanuel Addeh in Abuja

Fitch Ratings has downgraded Nigeria’s long-term foreign currency Issuer Default Rating (IDR) to ‘B-’ from ‘B’, pegging Africa’s biggest oil producer just six notches above default, and at par with Ecuador and Angola.
The new report is coming weeks after Moody’s, a global ratings agency, equally downgraded Nigeria’s local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2, placing the country for review for downgrade.
Moody’s said the decision was driven by the significant deterioration in Nigeria’s government finances despite a strong rise in international crude oil prices in 2022.

Following in the footsteps of Moody’s, Fitch, a renowned global rating agency, said the latest downgrade was due to government debt service costs and worsening external liquidity, despite higher crude prices in 2022, amongst others.
It added that the interest payments on debt stock exceeded government revenue in the first half of 2022.

The organisation stressed that the low oil production and the expensive subsidy on petrol have consumed most of the fiscal benefit of high oil prices during the year and would continue to stress already low government revenue levels.
According to Fitch, if subsidy payment is reduced in 2023, it would benefit public finances. However, it added that the constrained oil production and structurally low domestic non-oil revenue mobilisation will limit potential gains.

“Fitch expects that the implicit subsidy on petrol will cost the government approximately N5 trillion, which is 2.4 per cent of Gross Domestic Product (GDP), in foregone revenue from the Nigerian National Petroleum Corporation (NNPC) in 2022,” it stated.
The report added that this is expected to contribute to a widening of the general government fiscal deficit to 6.1 per cent of GDP.
Fitch noted the foregone revenue stems from the spread between the regulated pump price of petrol, which has averaged N190 per litre, and the import cost, which is above N300 per litre.

The rating agency said the Petroleum Industry Act (PIA) 2021 provides for the adoption of the market price for refined fuel products, pointing out however that plans to phase out the subsidy in 2022 were pushed back owing to higher global oil prices.
“In 2023, our base case scenario sees a gradual narrowing of the spread between the pump price and true market price of petrol, which is in line with the government’s proposed 2023 budget. However, we expect a longer timeframe for completely phasing out the subsidy, and therefore a higher level of foregone revenue,” Fitch stated.

Fitch argued that the February 2023 election will bring a new administration, which will likely introduce a supplemental budget, expressing the view that there will likely be public pressure to continue the fuel subsidy.
“Fitch forecasts Nigeria’s debt to increase to 34 per cent of GDP by end-2022. This includes the Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria (CBN).

“Nigeria’s debt stock is low compared with the forecast 2022 ‘B’ median of 57.6 per cent of GDP. However, its debt servicing metrics are among the highest for Fitch-rated sovereigns.
“We forecast government debt/revenue to increase to 580 per cent in 2022 and interest/revenue to reach 47.7 per cent, compared with the current ‘B’ medians of 282 per cent and 10.8 per cent, respectively. Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024,” it explained.
It is projected that Nigeria’s oil production will continue to be weighed down by the combination of oil theft, pipeline vandalism, and ageing infrastructure. This, it noted, will limit both the GDP growth and the government’s revenue performance.

“Production levels have been on a downward trend for several years and, after averaging 1.6 million barrels per day (mbpd) in 2021, fell to 1.2 mbpd in September 2022. We forecast 2022 crude oil production, including condensate, to average 1.3 mbpd and increase slightly to 1.4 mbpd in 2023.
“Fitch believes that the February 2023 general election will increase security risks in the oil-producing regions, but that the coming back online of the Forcados export terminal and the Trans-Niger pipeline could help to offset continued losses from theft and vandalism,” the report said.

It stated that while higher oil prices have brought an improvement in oil export receipts,  some of this has been offset by higher fuel imports,  projecting that the current account will move into a small surplus in 2022, from a deficit of 0.4 per cent in 2021.
Despite the improvement in the current account, Fitch forecast that reserves will end 2022 at $36.3 billion, down from $40.2 billion in 2021, and to continue falling in 2023-2024.

“Falling reserves levels have contributed to tight foreign-currency liquidity, as evidenced by the rapid depreciation in the parallel market rate, which was N855/$ on 8 November as compared with the official rate of N446/$.
“The inability to reliably source US dollars on the official FX market has in turn contributed to lower portfolio inflows, which will continue to put further pressure on foreign-currency liquidity,” the report noted.

It is estimated that the government faces external debt amortisations of $2.4 billion in 2023 and $2.7 billion in 2024, which will be met through a combination of reserves drawdown and new external borrowing, most likely syndicated loans.
According to Fitch, total external debt service will reach 11.8 per cent of current external receipts in 2022, which is lower than the ‘B’ median forecast of 18.6 per cent.

Growth in the service sectors, Fitch said, will continue to support GDP growth, which it forecasts at 3.0 per cent in 2022 and 3.1 per cent in 2023.
Moody’s had similarly pointed out that: “Externally, financial and capital outflows from Nigeria are exceeding the current account surplus, eroding foreign exchange reserves.”