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Long-term FX creditworthiness ‘positive’
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Affirms long-term FX IDR at ‘B-’
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On back of recent reforms
Onome Amuge
Global credit rating agency Fitch Ratings has shined a positive light on Nigeria’s long-term foreign-currency creditworthiness, upgrading its outlook to “Positive” and affirming the country’s long-term foreign-currency Issuer Default Rating (IDR) at ‘B-’, a sign that the agency sees promising prospects for the country’s fiscal and economic trajectory.
The latest rating from Fitch Ratings, a closely watched barometer of the Nigerian economy’s health, revealed a marked optimism in the nation’s prospects, as the global agency highlighted the strides made over the past year to restore macroeconomic stability and enhance policy coherence and credibility as key factors driving the upgrade to a “Positive” Outlook, a shift that brought with it a renewed hope for the country’s fiscal and economic future.
Fitch Ratings commended the Nigerian government’s efforts to chart a new course for the country’s economic trajectory, commending the adjustments made to the exchange rate and monetary policy frameworks, the scaling back of CBN financing, and the ongoing reforms aimed at boosting low government revenue and oil production.
It stated: “The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizeable inflows to the official foreign exchange (FX) market. Nevertheless, we see significant short-term challenges, notably, inflation is high and the FX market has yet to stabilise, and the durability of the commitment to reform is to be tested.
“The CBN has stepped up efforts to reform the monetary and exchange rate framework following last year’s unification of the multiple exchange rate windows, and the large differential between the official and parallel market rates has collapsed. Average daily FX turnover at the official FX window has risen sharply from 2H23, and there has been clearance of $4.5 billion of the backlog of unpaid FX forwards (the validity of the outstanding $2.2 billion is being assessed by CBN), and weekly sales of FC to bureaux de changes (BDCs) have resumed (having been suspended since 2021).
“Greater formalisation of FX activity and monetary policy tightening has contributed to a significant rise in foreign portfolio investment inflows, and a fast appreciation of the naira at the official FX window, following the 71 percent post-liberalisation depreciation between June 2023 and mid-March 2024, although the exchange rate remains volatile. However, Fitch views continued lack of clarity in the size of net FX reserves as a constraint on the sovereign’s credit profile.”
In a move reminiscent of a well-choreographed financial dance, Fitch Ratings predicted that the Central Bank of Nigeria (CBN) would continue its measured yet decisive steps towards stabilising the country’s economy, forecasting further increases in the monetary policy rate in the latter half of 2024, building upon the 600 basis point hike since February 2024.
Even as the Nigerian economy inched towards stability, the inflationary specter loomed large over the country, with Fitch Ratings predicting a persistent inflationary presence that would average 26.3 percent in 2024 and 18.2 percent in 2025, an unwavering shadow cast over the economy that remained far above the agency’s projected median for the ‘B’ rating of 4.5 percent.
Fitch Ratings unveiled its predictions for the Nigerian economy’s fiscal future, revealing a budget deficit that would expand, if only by a hair’s breadth, in 2024 to 4.5 percent of GDP, lower than the agency’s previous projections, but still a stubborn gap that reflected the country’s delicate balancing act of bolstering non-oil revenue, taming fuel subsidies, and navigating oil profits and debt servicing obligations.
It stated further: “We project a two pp rise in general government (GG) revenue/GDP from 2023 to 2025 to 9.6 percent, helped by increased mobilisation of non-oil tax revenue, to narrow the budget deficit to 4.1 percent in 2025. Nevertheless, the GG revenue/GDP ratio would remain one of the lowest of Fitch-rated sovereigns. The government has sharply reduced recourse to its CBN ‘Ways and Means’ overdraft this year, and banks’ healthy foreign currency (FC) liquidity and strong demand for government securities support domestic financing capacity.
“We expect oil refining capacity to increase in 2024-2025 as the Dangote plant ramps up, with an eventual 0.65 mbpd capacity. This will reduce transportation costs and lower refined oil imports, which should ease FX demand. We anticipate an increase in crude oil production (including condensates) in 2024-2025, averaging 1.75 mbpd, from 1.58 mbpd in 2023, helped by improved onshore surveillance, but this is still well below the 2019 level, reflecting underinvestment in the sector and production outages.”
Despite the fiscal challenges that weighed upon Nigeria’s economy, including weak governance indicators relative to peers, high hydrocarbon dependence, limited crude oil production capacity, weak net FX reserves, high inflation, ongoing security challenges, and structurally low, albeit improving, non-oil revenue, Fitch Ratings saw glimmers of strength in the nation’s inherent advantages, highlighting its expansive economy, well-developed domestic debt market, and rich reserves of oil and gas as fortifying factors in its rating.
