Fitch Hints on Nigeria’s Next Credit Outlook Upgrade

James Emejo in Abuja

Fitch Ratings has hinted at a potential upgrade of the country’s credit outlook by November should certain macroeconomic indices improve.

Earlier in May, the ratings agency had revised the outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable, and affirmed the IDR at ‘B-‘.

However, Senior Director, Sovereigns at Fitch Ratings, Douglas Winslow, in a report on Sovereign Rating Outlook for Nigeria, said reduction in external vulnerabilities, particularly due to a sustainable recovery in the CBN’s FX position, and further easing of domestic Foreign Currency (FC) supply constraints or sustained current account surpluses could be triggers for possible ratings upgrade.

Winslow said improved credibility and consistency in monetary and fiscal policy-decision and FX management, resulting in a sustained reduction in inflation and greater stability in the FX market would also be positive for the country.

Fitch further elaborated that the country’s credit rating could be adjusted upwards with sustainable improvement in public finances, potentially arising from an increase in oil revenue, and stronger mobilisation of domestic non-oil revenue.

On the other hand, Winslow said the country could be downgraded amid heightened external liquidity stress, potentially illustrated by a deterioration in the CBN’s net FX position, due to severely constrained external financing sources, failure to push ahead with exchange rate reforms contributing to capital outflows or banks not rolling over FX swaps with the CBN, and/or sustained lower oil receipts.

He warned that higher risk of debt servicing difficulties, stemming from a widening fiscal deficit, failure to put the interest/revenue ratio on a downward path, weaker demand for domestic government debt, and constrained access to Eurobond financing may earn the country a credit outlook downgrade.

Other headwinds to credit outlook upgrade include greater macro-instability in the form of more entrenched high inflation or high GDP growth volatility, potentially due to renewed greater central bank fiscal financing, looser monetary policy settings, and the re-emergence of FX shortages in the economy.

Fitch’s next scheduled sovereign review is due on November 1, 2024.

The report which was co-authored by Director, Sovereigns, at Fitch, Gaimin Nonyane, stressed that amid Nigeria’s inflationary environment and tightening regime, negative real interest rate has persisted, adding that while debt costs appeared to have fallen, borrowing stock remained high.

The report also ranked Nigeria’s revenue/GDP as lowest among B-rated sovereigns including Iraq, Mongolia, Maldives, Turkiye, Nicaragua, Barbados, Cabo Verde, Rwanda, Gabon, Bahrain, Angola, Cameroon, Egypt, Kenya and among others.

It identified some of the measures taken to contain fiscal risks to include the securitisation of N22.7 trillion CBN overdraft which is 11 per cent of 2022 GDP at nine per cent interest, and three-year grace period on the principal.

The report noted that the central bank financing being scaled back while N4.8 trillion of an additional N7.3 trillion overdraft had already been repaid.