Culled—Proshare
October 8, 2020
By FDC Ltd
Fitch Ratings, one of the global credit rating agencies, recently revised Nigeria’s outlook to stable from negative while affirming the country’s credit rating at ‘B’. The revision reflects an improvement in the domestic economy following the gradual phasing out of lockdown restrictions and reduced external pressures attributed to the CBN’s forex rationing measures and partial exchange rate adjustment. The IMF’s $3.4bn loan, amongst others, also helped to moderate the impact of the COVID pandemic and lower oil prices on the economy.
Impact
Foreign investors rely on credit ratings to assess a country’s credit worthiness, which in turn, influences borrowing costs. The revision of Nigeria’s outlook to stable from negative is expected to improve Nigeria’s risk perception, thus increasing the country’s ability to borrow from the capital market while lowering Nigeria’s borrowing costs. The President is set to submit the 2021 appropriation bill to the National Assembly this week. The fiscal deficit is expected to widen to N4.48trn (3.6% of GDP). The improved credit ratings, if sustained, will enable Nigeria access 4 loans at more favourable terms and lower the country’s debt service burden. Timely passage and implementation of the budget will aid the realisation of the government’s economic recovery efforts.
In addition, the positive revision to Nigeria’s outlook is also expected to boost investor confidence in the Nigerian economy which should spark renewed interest from Foreign Portfolio Investors (FPI). FPI inflows fell sharply by 91.06% to $385.32mn in Q2’20 from $4.31bn in Q1’20. The projected increase in FPI will support the country’s reserves level ($35.75bn as at October 2nd), which has been severely affected by dwindling oil prices and cross country movement restrictions.
The potent risks to this outlook include a further drop in oil prices, dollar scarcity and difficulty in repatriating funds, resurgence of COVID infections leading to a precision lockdown and halting international travels and trade as well as a possible default in government’s debt repayment.
