Fitch revises Nigeria’s rating outlook to stable

Fitch yesterday revised the outlook of Nigeria’s credit rating to stable from negative, saying the likelihood of reforms increased as the government appointed a strong economic team after the April elections, according to Reuters.
Fitch currently rates Nigeria at BB-minus. It had revised the outlook on that rating to negative about a year ago, as foreign reserves declined rapidly during three consecutive quarters.

That deterioration in reserves was halted, Fitch said, as the government adopted a tighter monetary policy and a some fiscal discipline.
The Central Bank of Nigerian (CBN) had initiated a number of monetary tightening policies recently by doubling banks’ Cash Reserve Ratio (CRR) from four to eight per cent; net open positions banks can hold as reserves was reduced to 1 per cent of shareholders funds, from 5 per cent; reserve averaging method of computation was suspended in favour of daily maintenance until further notice – all in a bid to reduce the quantity of naira in the system and free up dollar supply.

These measures have strengthened the naira at both the interbank and official markets.  The naira closed at N157.20 to the dollar at the interbank last Wednesday, firmer than the N159.85 of the previous day, supported by dollar inflows from two energy firms. At the official window, the naira has firmed from N154 per dollar two weeks ago, to N149.95.

Also, bond yields and interbank rates rose sharply as markets aligned after the CBN’s bigger-than-expected benchmark interest rate hike.

The Federal Government has similarly stepped up efforts to reduce spending  –  starting with the recurrent expenditure by making moves to thrash ghost workers and pensioners. It has also floated a Sovereign Wealth Fund (SWF) with an initial capital of $1billion (N160billion).

Fitch had lowered Nigeria’s outlook last year primarily because of the withdrawals from the Crude Accounts. That and a continued gradual fall of international reserves at a time of high oil prices and record oil production were major concerns, Fitch had said. They also raised vulnerability to any renewed fall in oil prices and threatened macroeconomic stability.

Fitch director Veronica Kalema had said that while there were plans to remedy the situation through the establishment of a sovereign wealth fund and removal of the fuel subsidy currently taken out of the country’s excess crude account, implementing those actions “will be challenging before elections expected in April next year.” The poll has increased short-term political uncertainty, Fitch said.
Other major constraints on the rating — low per capita income, weak transparency and governance and the infrastructure deficit, especially the power shortage — remain in place.

Nigeria’s national infrastructure is poor and power generation is grossly inadequate, resulting in low industrial production while offices and homes go for days without electricity.

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