Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a Negative Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
The ‘B+’ rating reflects Nigeria’s position as Africa’s largest economy and most populous country, its net external creditor position, and its well-developed domestic debt markets, balanced against a high level of hydrocarbon dependence, low levels of domestic revenue mobilisation and GDP per capita, and low rankings on governance and business environment indicators. The Negative Outlook reflects uncertainty about the sustainability of the economic growth momentum as the impact of earlier shocks eases and progress on addressing high interest service ratios.
Fitch forecasts Nigeria’s GDP growth to accelerate to 2.4% in 2018, as the country continues to climb out of the oil price shock recession that characterised 2016 and 1Q17. Growth turned positive in 2Q17, and the recovery of oil production, to 2.1 million barrels (including condensates) per day (mbpd) by 4Q17, boosted oil sector output. Additionally, greater FX availability provided a lift to the non-oil export sectors, particularly agriculture. Fitch expects that these trends will continue, but notes that tight monetary conditions will continue to weigh on Nigeria’s growth outlook. Fitch forecasts 2019 growth to rise slightly to 3.0%, compared with 4.8% for the five years prior to 2016.
At 11.6%, the five-year average inflation is much higher than the ‘B’ category median (4.9%). At its most recent meeting in April 2018, the central bank held its monetary policy rate at 14%, where it has been since July 2016. The need to support the naira and lingering inflation pressures mean that the Central Bank of Nigeria (CBN) will ease monetary policy only gradually.
The naira has fluctuated close to NGN360 per USD on the Investors & Exporters (I&E) window since its introduction in April 2017. Given most FX activity is now handled on the I&E window, this implies a devaluation by 45% since the start of FX regime adjustments in June 2016. Together with higher oil prices and production, this has contributed to the convergence between the parallel market and the I&E rate. However, the FX market remains segmented and the continued use of exchange controls inhibit greater foreign-currency liquidity and capital inflows. In Fitch’s view, there is unlikely to be any further substantial change by the CBN to the existing FX rate regime before the 2019 elections.
Increasing oil receipts and import compression have buoyed Nigeria’s trade surplus and brought the current account surplus to an estimated 2.2% of GDP in 2017. Fitch expects that imports will begin to return to historical levels, especially as government capital expenditure increases, and the current account surplus will narrow in 2018. Nigeria’s reserves position has increased to a four-year high due to stronger oil receipts and considerable hard-currency bond placements. As of end-April, gross international reserves were USD47.5 billion, or eight months of current external payments (CXP), well above the ‘B’ median of 3.9 months of CXP, but Fitch notes that USD5 billion of reserves is pledged in forward positions.
The government’s inability to substantially increase domestic revenue mobilisation remains a key rating weakness. Non-oil revenue increased slightly in 2017, to 3.4% of GDP and will continue growing slowly as a result of new revenue measures and efforts to increase the tax base, but any increase comes from a very low base. As a result, general government debt as a percentage of revenue will increase to 311% in 2018, compared with the ‘B’ median of 240%. The ratio of Federal Government of Nigeria (FGN) debt to FGN revenue is even higher, estimated at 623% as of end-2017. However, relative to GDP, general government debt will be only to 20.5% of GDP in 2018, well below the ‘B’ median of 61.5%.
Fitch expects that in 2018 the general government fiscal deficit will contract only slightly to 4.2% of GDP, from an estimated 4.6% in 2017. The government’s attempts at fiscal consolidation have been hampered by low levels of tax coverage and compliance, rigidities in Nigeria’s budgeting framework, and consistent delays in approving budgets. The forecasts are based on a conservative oil price assumption of USD57.5/b, so a higher oil price could reduce the deficit significantly, if the windfall is not directed towards spending.
The banking sector has been aided by the easing of foreign-currency liquidity, but economic headwinds, combined with high loan concentration, have eroded asset quality and capital adequacy. The ratio of non-performing loans to total loans increased to 15.1% in 3Q17 from 5% in 2015, although pressures are likely to ease in 2018 and provisioning coverage is fairly healthy. Capital adequacy fell to approximately 10.6% in 3Q17, from 18% in 2015. Tight monetary conditions have weighed on credit provision and credit to the private sector contracted by 3.7% in 2017. Nevertheless, the sector remains highly profitable and that is not expected to change.
The general election scheduled for February 2019 could further weaken progress on the reform agenda and aggravate ongoing security challenges. Most importantly, any flare-up of insurgent activity in the oil-producing Niger Delta would hit fiscal and external revenue. In 2016 and 2017, increased insurgent activity caused a fall in oil production to a low of 1.7mbpd.
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 scale.
Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
– External Finances: +1 notch, to reflect Nigeria’s position as a net external creditor with sovereign net foreign assets well above the ‘B’ median.
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.
The main factors that could lead to a downgrade are:
– Failure to achieve a sustainable fiscal consolidation leading to a marked rise in the government debt/revenue ratio.
– A loss of foreign exchange reserves that increases vulnerability to external shocks.
– Worsening of political and security environment that reduces oil production for a prolonged period.
The current Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to a stabilisation of the Outlook:
– A reduction of the fiscal deficit through sustainable consolidation measures, leading to an increase in non-oil revenue and the maintenance of a manageable debt burden.
– Increased confidence that policy adjustments will deliver sustained growth and higher resilience to shocks.
– Successful implementation of structural reforms, for instance in increasing economic diversification or achieving significant reforms in the petroleum sector.
Fitch’s forecasts are for Brent crude to average USD57.5/b in 2018 and in 2019, based on the Global Economic Outlook published in March 2018.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at ‘B+’; Outlook Negative
Long-Term Local-Currency IDR affirmed at ‘B+’; Outlook Negative
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+’