Analysis: Fitch’s Nigeria stable outlook rating: Glimmer of Hope?

Charles Abuede

• Nigeria’s Long-Term Foreign-Currency Issuer Default
• Rating (IDR) downgraded to ‘B’ from ‘B+ Rating principally influenced by CBN’s management of external liquidity pressures

Fitch Ratings, an international ratings agency has revised its outlook for Nigeria to stable following condensed uncertainties, stable oil prices and the reopening of the economy. This was after the agency downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook in April 2020 due to COVID-19 pressures.

The rating action was also principally influenced by the external liquidity pressure which was managed by the apex bank through partial exchange rate adjustment, capital controls, FX restrictions and the rise in external reserves following the disbursement of IMF’s $3.4 billion Rapid Financing Instrument (RFI).

However, the rating agency cited the persistence of external vulnerabilities due to an overvaluation of the naira and backlog of large FX demand. The revision to the rating is surprising given that severe external and fiscal financing pressures persist. While Fitch alluded to stable oil prices, the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices.

The slow and uneven recovery in global oil demand is also expected to linger till the end of 2021, implying that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geopolitical tensions. Beyond oil & gas exports, which only accounts for 35.8 per cent of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce.

External reserve, which stands at $36.2 billion, despite inflows from IMF, is still down 15.5 per cent on-year to date. Meanwhile, the adjustments to the official exchange rate from N307 to N380 to a dollar in August and the slight weakness in the NAFEX to N380 from N360 to a dollar is too weak to correct the shock from weak oil prices, falling remittances and reduced capital flows.

However, the restrictions on FX demand and the existing FX demand backlog have brought about a significant premium of around N79 in the parallel market, which is now considered a more market reflective segment.

Meanwhile, the implication of the measures CBN has adopted appears to be understated by Fitch, despite citing its impacts in the form of slow growth recovery, trade weakness and poor investor confidence. With foreign investors still holding around $10 billion of OMO bills as at August 2020, according to Fitch, there remains a severe risk to the external reserves and the currency, especially given weak prospects for the recovery of oil and non-oil sources of FX supply