Fitch Affirms Nigeria at ‘B plus’; Outlook Stable

Tuesday, June 11, 2019  /  12:17PM  /  Fitch Ratings / Header Image Credit:


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


A full list of rating actions is at the end of this
rating action commentary.


Key Rating Drivers

Nigeria’s ratings are supported by the large size of
its economy, a track record of current account surpluses and a relatively low
general government (GG) debt-to-GDP. This is balanced against poor governance
and development indicators, structurally low fiscal revenues and high
dependence on hydrocarbons. The rating is also weighed down by subdued GDP
growth and inflation that is higher than in rating peers.

The 2019 general and gubernational elections passed
relatively smoothly, despite technical disruptions and episodes of violence.
The incumbent Muhammadu Buhari won a second term and his ruling All
Progressives Congress (APC) regained its majority in both chambers of
parliament. This could facilitate policy implementation, but weak party
discipline in parliament and frequent disagreements between the presidency and
legislature point to a continued high risk of delays to parliamentary approval
of key legislation. Fitch expects policy continuity with the implementation of
only piecemeal reforms, resulting in slow progress on tackling long-standing
impediments to growth and weaknesses in macroeconomic management.

Nigeria’s fiscal performance mostly remains a function
of fluctuations in oil revenues. However, the implicit subsidy of petrol prices
(around 0.6% of GDP in 2018), the gradual clearance of joint-venture (JV) cash
call arrears (outstanding stock of 1% of GDP at end-2018) and the conversion of
government oil proceeds to naira at a below-market exchange rate continue to
constrain budget receipts from hydrocarbon extraction. Fitch estimates that the
GG deficit narrowed to 3.6% of GDP (federal government, FGN: 2.3% excluding
transfers to state and local governments, SLGs) in 2018 from 4.5% in 2017 (FGN:
3.2%), mostly reflecting the recovery in oil prices.

Fitch forecasts the GG deficit to widen to 3.8% of GDP
(FGN: 2.6%) in 2019 and further to 4.6% in 2020 (FGN: 3%) as the rise in oil
production with the coming on stream of the Egina oilfield will be offset by
the decline in oil prices under our baseline. Public finances are vulnerable to
disruptions to production caused by recurrent acts of vandalism or other force
majeure affecting Nigeria’s aging oil infrastructure. A USD10 change per barrel
in the Brent oil price against our assumptions would, all else equal, impact
the GG balance by around 0.6% of GDP.

Nigeria’s particularly low non-oil fiscal revenues
averaging only 3.7% of GDP over 2016-2018 are a key rating weakness, reducing
the fiscal space and resulting in a high fiscal Brent breakeven price of USD129
per barrel in 2019 and USD149 in 2020, according to Fitch’s estimates. A
two-thirds rise in the minimum wage entered into force in April and could cause
pressures on public finances, particularly for cash-strapped SLGs, although
there is high uncertainty regarding its effective implementation date and fiscal
cost. The government is contemplating offsetting measures, including a VAT rate
increase, which faces strong opposition across the political spectrum.

Interest payments consumed 27% of GG revenues (FGN:
53%) in 2018 based on Fitch’s estimates, double the current ‘B’ median of 13%
and will rise to 30% of revenues (FGN: 65.6%) in 2020, highlighting the risks
to debt sustainability arising from low fiscal receipts. The authorities aim to
contain the rise in the interest cost by substituting external concessional and
commercial borrowing to onerous domestic financing. They also plan to reduce
debt through partial privatisations of oil JV assets, which we do not expect to
materially reduce their oil revenues.

GG debt will rise from 25% of GDP (FGN: 20%, including
central bank overdrafts) in 2018 to 28.2% of GDP (FGN: 22.4%) in 2020, still
well below the projected current ‘B’ median of 56%, under Fitch’s forecasts.
Around 71% of GG debt was naira-denominated at end-2018, limiting refinancing
and exchange rate risks but high direct and indirect foreign holdings of
local-currency debt expose Nigeria to shifts in investor sentiment and global
funding conditions. The debt of the Asset Management Corporation of Nigeria
(AMCON) of 3.2% of GDP at end-2018 constitutes a contingent liability for the
sovereign, and could rise in the context of high non-performing loans in the
banking sector of 11.7% of total bank loans and an elevated proportion of
restructured loans.

The Central Bank of Nigeria (CBN) operates a multiple
exchange rate regime, which Fitch expects to be maintained for the foreseeable
future. The naira exchange rate on the “Investors and Exporters”
(I&E) window where most FX transactions take place, has remained stable in
a narrow range since September 2017; the premium on parallel markets against
the I&E rate has also mostly dissipated. These developments reflect
improved FX availability supported by the recovery in oil prices and portfolio
inflows, tight liquidity management and market interventions by the CBN as well
as continued FX restrictions.

Continued high inflation could contribute to an
overvaluation of the exchange rate and remains a credit weakness. Fitch
projects inflation will average close to 12% in 2019-2020, well above the
projected current ‘B’ median of 4.8%, propped up by cost-push factors. The
impact of the monetary policy rate 50 basis-point cut in March on macroeconomic
and financing conditions will be muted as the monetary policy stance is mostly
determined by the CBN’s liquidity management operations.

Nigeria’s international reserves provide a sizeable
external buffer, at USD42.8billion equivalent to six months of current account
payments at end-2018, well above the current ‘B’ median of 3.5 months. However,
Fitch notes that around USD6 billion of reserves are pledged in forward
positions. Reserves are also buoyed by non-resident holdings of short-term CBN
bills which amounted to USD15.8 billion (4% of GDP) at end-April, exacerbating
susceptibility to reversals in volatile portfolio inflows and generating
rollover risks. Non-resident holdings of CBN bills might not be entirely
reflected in Nigeria’s external balance sheets statistics.

Nigeria’s long-standing net creditor external position
has shifted to balance in 2018 reflecting a rapid rise in gross external debt,
which has doubled in three years, increasing to 30.6% of GDP in 2018 from 15.3%
in 2015. It still remains stronger than the current ‘B’ median of a net debtor
position of 25% of GDP. Lower oil revenues will drive the current account close
to balance in 2020 from an estimated surplus of 2.6% of GDP in 2018, under
Fitch’s forecasts.

Nigeria will continue to experience a sluggish
recovery driven by the rebound in oil prices and the expansion of services.
Fitch forecasts GDP growth to average 2.2% in 2019-2020, below its previous
10-year average of 4.2% and the current ‘B’ median of 3.4%. High unemployment
and inflation will constrain private consumption while investment is held back
by tight credit supply, a weak business climate and regulatory uncertainty in
the oil sector. A large infrastructure deficit, which is illustrated by acute
power supply shortages and security challenges, also dampen the medium-term
growth outlook.


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 (LT FC) IDR

In accordance with its rating criteria, Fitch’s
sovereign rating committee decided not to adopt the score indicated by the SRM
as the starting point for its analysis because the SRM output has migrated to
‘B’ from ‘B+’, but in our view this is potentially a temporary deterioration.

Assuming an SRM score equivalent to a rating of ‘B+’,
Fitch’s sovereign rating committee did not adjust the output from the SRM to
arrive at the final LT FC IDR.

The removal of a +1 notch on external finances
reflects the upward revision to Nigeria’s external debt statistics based on IIP
data published by the IMF and the CBN, which has led to a significant
deterioration in Fitch’s estimate of Nigeria’s sovereign net foreign assets.
The removal of a -1 notch on public finances reflects our view that risks to
debt sustainability arising from Nigeria’s structurally low level of general government
revenues are reflected by the rise in the general government interest
payments-to-revenue ratio and are adequately captured in the SRM.

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.


Rating Sensitivities

The main factors that could lead to positive rating
action are:

  • A reduction of the fiscal deficit and stronger
    mobilisation of domestic non-oil revenues;
  • Stronger growth potential for example due to
    implementation of structural reforms and macroeconomic policy adjustments.


The main factors that could lead to negative rating
action are:

  • Failure to achieve a sustainable fiscal
    consolidation leading to a marked rise in the ratios of government debt and
    interest payments to revenues.
  • A loss of foreign exchange reserves that increases
    vulnerability to external shocks.
  • Worsening of political and security environment that
    significantly disrupts oil production or economic activity for a prolonged


Key Assumptions

Oil and gas revenues accounted for 44% of general
government revenues and 60% of current-account receipts over the last five
years. Fitch forecasts a stable Nigerian oil production volume of 2 million
barrels per day (mmbpd, including condensates) in 2019 and 2020 against a 2019
budget assumption of 2.3 mmbdp. The agency also projects Brent oil prices to
average USD65/barrel in 2019 -against a budget projection of USD60- and
USD62.5/barrel in 2020, down from USD71.6/barrel in 2018.

Other commodity prices and global economic trends are
assumed to develop as outlined in Fitch’s most recent Global Economic Outlook
published in March 2019.

Nigeria does not publish consolidated fiscal data on a
general government basis, which complicates the assessment of fiscal
performance. Fitch produces 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 Nigerian National Petroleum
Corporation (NNPC), the CBN, the Debt Management Office (DMO), the Budget
Office of the Federation (BOF), the National Bureau of Statistics (NBS) and the
Office of the Auditor General for the Federation (OAGF).


The full list of
rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at ‘B+’;
Outlook Stable

Long-Term Local-Currency IDR affirmed at ‘B+’; Outlook

Short-Term Foreign-Currency IDR affirmed at ‘B’

Short-Term Local-Currency IDR affirmed at ‘B’

Country Ceiling affirmed at ‘B+’

Issue ratings on long-term senior unsecured
foreign-currency bonds affirmed at ‘B+’

Proshare Nigeria Pvt. Ltd.

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