March 24, 2021/Proshare
By FBNQuest Research
Fitch last week affirmed its ‘B’ sovereign rating with a stable outlook on the FGN’s long-term, foreign currency obligations.
The rating is one notch above S&P’s. A ratings review provides an agency with good access to policymakers and official data, and this is no exception.
The Debt Management Office (DMO) shows public debt at 21.6% of GDP at end-2020.
While this definition covers the domestic and external obligations of the FGN and the states, Fitch measures the debt and finances of general government (for all three tiers). It forecasts general government debt at 32.6% of GDP in 2022 but this includes the proposed securitizarion of the FGN’s Ways and Means advances from the CBN, which it reports as NGN13.2trn at end-September ’20.
The DMO’s medium-term strategy for 2020-23 caps public debt at 40% of GDP, which leaves headroom for the inclusion of these advances and a sharp increase in other obligations.
The agency takes the sensible view that the weak point of Nigeria’s debt profile is poor revenue collection. It is sceptical about prospects for a rapid improvement in non-oil tax revenue, citing a combination of poor compliance, capacity constraints in the collection agencies and tax credits that will be hard to remove.
The narrative surrounding oil revenue is more positive because the FGN once again made a conservative average price assumption for crude in the budget (of USD40/b). The Fitch forecast is USD58b/b for UK Brent, which itself is cautious in our view. Our forecast of an average of USD56/b was made in January before sentiment began to turn on the rollout of vaccination programmes in some advanced economies and is in need of a sizeable upward revision.
Fitch has the general government deficit at 4.0% of GDP this year (and next) and calculates that a USD10/b shift in the crude price (relative to its forecast) would move the balance by about 0.5% of GDP. Similarly, a 10% change in average crude output (relative to its 1.87mbpd for 2021) would have an impact of about 0.3% of GDP on the balance.
The currency is overvalued according to Fitch (and many others), leading to pressure on the current account and official reserves. We have seen comments on a change in exchange-rate policy attributed to the federal finance minister on the newswires. The comments suggest unification of rates (or something very close to it) but we are waiting for confirmation from another source (ideally the CBN).
The Fitch commentary is revealing on the pipeline of delayed external payments due to foreign portfolio investors (FPIs). The CBN argues, Fitch notes, that most of the estimated backlog of USD2bn has been cleared through spot and forward sales of fx. If this was confirmed, it would have a positive impact on FPI sentiment as the authorities look to cover a FGN budget deficit projected at NGN5.6trn.
Of that deficit, NGN4.7trn is to be covered by the DMO with a 50/50 split between domestic and external borrowing. The FGN declined to refinance the USD500m Eurobond that matured in January, opting for repayment. Rather than comment on current rumours of a return to the market, we will just note that the conditions for issuance by EM sovereigns are favourable.
Fitch says that the FGN has held to its commitment in March ’20 to remove the fuel price subsidy yet notes in the same breath that retail prices of gasoline have not been adjusted to reflect the sharp rise in the international price.
