November 6, 2023/Fitch Ratings

Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook. 

Key Rating Drivers

Fundamental Strengths and Weaknesses: Nigeria’s ‘B-‘ rating is supported by a large economy, a developed and liquid domestic debt market, and large oil and gas reserves. The rating is constrained by weak governance, structurally very low non-oil revenue, high hydrocarbon dependence, security challenges, high inflation, low net FX reserves and ongoing weakness in the exchange-rate framework.

Stable Outlook: The government has taken important steps to reduce fuel subsidies and reform the exchange rate framework much more quickly than we anticipated and has ambitions to substantially raise revenue. However, there has recently been some backtracking on reforms, notably a lower degree of price discovery in the FX market than in late June, raising doubt about the strength of this positive momentum. In addition, new data on the Central Bank of Nigeria (CBN) suggests its net foreign-exchange position is substantially weaker than we previously understood. These factors are reflected in the Stable Outlook.

Faster Reform Progress, Constraints Remain: Reform progress since President Bola Tinubu’s government came to power in May 2023 has been faster than we anticipated at our last review. In June, the government removed fuel subsidies, which cost near 2% of GDP in 2022. It also unified the multiple exchange rate windows, and the official investors and exporter rate was allowed to depreciate by close to 40%, with renewed volatility around end-October.

Fitch views the cabinet, particularly Finance Minister Wale Edun, and the new CBN governor as supportive of reform. However, there are still sizeable socio-political challenges to implementation, including an acceleration in inflation, which could account for recent backtracking of some reforms.

Challenging Exchange Rate Liberalisation: FX shortages continue to weigh on economic activity and further FX liberalisation, and deter foreign capital. In October, the CBN lifted the ban on providing FX for imports of 43 items, and is currently taking forward plans to clear near USD6.7 billion of unmet FX forwards. However, there has been a renewed widening of the gap between the official and parallel exchange rates since July with a premium of over 30% over the official rate. Average daily FX turnover at the official exchange rate window has fallen back to near April 2023 levels (well below pre-pandemic), at USD95 million in September.

Weaker Net FX Reserve Position: The CBN’s gross FX reserves fell to USD33.2 billion in September, from USD37.1 billion at end-2022. In August 2023, the CBN published its consolidated financial statements for 2022, its first since 2015. These indicate its net foreign exchange position is weaker than we understood, although sizeable gaps remain, preventing a reliable assessment. Short-term CBN liabilities at end-2022 included USD5.5 billion of foreign-currency (FC) securities lending, and USD6.8 billion of FC forward payables.

There is a particular lack of detail on additional near USD32 billion of “FX forwards, OTC futures, and currency swaps”, which is recorded as an off-balance-sheet “commitment” and not broken down. While this likely includes some non-deliverable contracts settled in naira and commitments of a longer tenor, it suggests domestic bank swaps with CBN are probably higher than the USD10-12 billion Fitch previously estimated. Nevertheless, we expect most swaps will continue to be rolled over, reflecting incentives for banks to invest the naira received in high-yielding sovereign securities and the sector’s limited reliance on swaps for FC liquidity, given sizeable FC placements with international banks.

Moderate Near-term External Debt Service: We forecast a broadly flat current account surplus, averaging 0.5% of GDP in 2023-2024. There is a lack of detail on a recent government announcement to raise USD10 billion of FX, including whether this includes World Bank budget support loans of USD1.5 billion. Following the sharp depreciation this year, Fitch assumes exchange-rate adjustments proceed more gradually in subsequent years. Near-term sovereign external debt service is moderate, at USD4.3 billion in 2024 (10.2% of current external receipts below the projected 2024 ‘B’ median of 17.7%).

Partial Oil Production Recovery: There has been only a partial recovery in oil production, to 1.57 mbpd (including condensates) in September from a low of 1.25 mbpd in September 2022, and we anticipate a moderate increase in 2024-2025, averaging 1.81 mbpd, helped by improved onshore surveillance. However, this is still well below the 2.09 mbpd in 2019, reflecting chronic underinvestment in the sector, and likely ongoing production outages.

Budget Deficits to Narrow: Fitch forecasts the budget deficit narrows 0.2pp in 2023, to 5.2% of GDP, as strong non-oil revenue growth and fuel subsidy removal is offset by higher capital spending and underperformance in oil profits from Nigerian National Petroleum Corporation Limited. We project a 1.1% pp of GDP rise in government revenue in 2023-2025, to 8.5% of GDP, helped by increased government efforts to mobilise non-oil tax revenue (including establishing a presidential fiscal and tax reform committee), but this remains one of the lowest ratios of any Fitch-rated sovereign. This underpins our forecast for the budget deficit/GDP to narrow to 5.0% and 4.6% in 2024 and 2025.

Depreciation Drives Rise in Public Debt: Nigeria’s public debt (excluding CBN loans) has a fairly long average maturity of 9.7 years. The securitisation of NGN23 trillion of CBN loans at a lower interest rate of 9% has helped contain general government interest costs, but at near 42% of revenues, overall interest expenditure is well above the ‘B’ median of 10.9%. We expect much lower recourse to CBN financing in 2023-2024 than in 2022, although there is a risk demand from the domestic banking sector turns out to be weaker than expected, despite its ample liquidity and strong deposit growth (38% in 1H23 yoy).

Fitch forecasts general government debt/GDP to stabilise at 43.9% of GDP in 2024-25, having risen from 35.2% at end-2022 on the depreciation of the naira, and below the projected 2024 ‘B’ median of 54.8%.

Macroeconomic Challenges to Persist: We project GDP to slow to 2.6% in 2023, from 3.3% in 2022, and to expand 3.2% in 2024 driven by the services sector and higher oil production. Nigeria’s already structurally high inflation rose to an average of 25.5% yoy in 3Q23, from 20.3% yoy in 3Q22, partly reflecting fuel subsidy removal and naira devaluation. Fitch projects inflation moderates to 21.1% in 2024 from an average 24.8% in 2023, helped by lower deficit monetisation, but well above the ‘B’ medians of 6.0% and 4.9%, respectively.

CBN has raised the policy interest rate by 725bp to 18.75% since April 2022, tightened reserve requirements, and phased out credit support schemes, but liquidity and credit growth remain strong, reflecting still relatively loose policy settings.

ESG – Governance: Nigeria has an ESG Relevance Score of ‘5’ for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Nigeria has a low WBGI ranking at the 17th percentile, reflecting weak institutional capacity, uneven application of the rule of law and a high level of corruption.

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-External Finances: Greater risk of intensification of external liquidity stress potentially illustrated by a further decline in the CBN’s net FX position, for example, due to lower oil receipts, severely constrained external financing sources, or failure to execute exchange-rate reform that contributes to capital outflows or banks not rolling over FX swaps with the CBN.

-Public Finances: Higher risk of debt servicing difficulties, for example, stemming from a widening fiscal deficit, further increase in the cost of, and weaker demand for, domestic government debt, and ongoing highly constrained access to Eurobond financing.

-Macro: Greater macro-instability in the form of more entrenched high inflation or high GDP growth volatility, potentially due to further central bank fiscal financing, loose monetary policy settings, unanchored inflation expectations, and more severe FC shortages in the economy.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

-External Finances: Reduction in external vulnerabilities, for example, due to a sustainable recovery in the CBN’s FX position, easing of domestic FC supply constraints or sustained current account surpluses.

-Public Finances: Structural improvement in public finances, potentially arising from a sustained increase in oil revenue, and stronger mobilisation of domestic non-oil revenue.

-Macro: Improved credibility and consistency in monetary policymaking and FX management, resulting in a sustained reduction of inflation and distortions in the FX market.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch’s proprietary SRM assigns Nigeria a score equivalent to a rating of ‘B-‘ on the Long-Term Foreign-Currency IDR scale.

Our sovereign rating committee did not adjust the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR.

Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Country Ceiling

The Country Ceiling for Nigeria is ‘B-‘, in line with the LT FC IDR. This reflects no material constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into FC and transferring the proceeds to non-resident creditors to service debt payments.

Fitch’s Country Ceiling Model produced a starting point uplift of 0 notches above the IDR. Fitch’s rating committee did not apply a qualitative adjustment to the model result.

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

Nigeria does not publish consolidated fiscal data on a general government basis, which complicates our assessment of fiscal performance. Fitch is able to produce its own estimates for general government fiscal metrics based on disaggregated data on federal, state and local government revenue, spending and debt published by the NNPC, the CBN, the Debt Management Office, the Budget Office of the Federation and the National Bureau of Statistics. Fitch’s estimates are broadly consistent with and comparable to the data used for other sovereigns. The data used was deemed sufficient for Fitch’s rating purposes because we expect that the margin of error related to the estimates would not be material to the rating analysis.

ESG Considerations

Nigeria has an ESG Relevance Score of ‘5’ for Political Stability and Rights as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.

Nigeria has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicators, this has a negative impact on the credit profile.

Nigeria has an ESG Relevance Score of ‘4’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.

Nigeria has an ESG Relevance Score of ‘4’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Nigeria, as for all sovereigns. As Nigeria has a fairly recent restructuring of public debt in 2005, this has a negative impact on the credit profile.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.