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Fitch lowers Nigeria’s ratings, says further contraction likely

By on June 25, 2016

Fitch Ratings, a global credit rating agency, on Thursday downgraded Nigeria’s long-term foreign currency Issuer Default Rating to ‘B+’ from ‘BB-’ and long-term local currency IDR to ‘BB-’ from ‘BB’, describing the outlooks as stable.

The IDRs opine on an entity’s relative vulnerability to default on financial obligations, the agency said on its website.

It said the issue ratings on Nigeria’s senior unsecured foreign currency bonds had also been downgraded to ‘B+’ from ‘BB-’, adding that the country ceiling had been revised down to ‘B+’ from ‘BB-’ and the short-term foreign currency IDR affirmed at ‘B’.

“The downgrade of Nigeria’s IDRs reflects the following key rating drivers: Nigeria’s fiscal and external vulnerability has worsened due to a sharp fall in oil revenue and fiscal and monetary adjustments that were slow to take shape and insufficient to mitigate the impact of low global oil prices,” Fitch said in a statement.

It noted that renewed insurgency in the Niger Delta in the first half of the year had lowered oil production, magnifying pressures on export revenues and limiting the inflow of hard currencies.

Fitch predicted that Nigeria’s general government fiscal deficit would grow to 4.2 per cent this year, after averaging 1.5 per cent in 2011-2015, before beginning to narrow in 2017.

It stated that the government had adopted a fiscal adjustment strategy centred on raising non-oil revenue and had made some progress in raising tax revenue by improving collection and improving the control over revenue raised by government departments and state-owned enterprises.

The rating agency, however, expects overall general government revenue to drop to just 5.5 per cent of the Gross Domestic Product, from an average of 12 per cent in 2011-2015, despite expected increases in non-oil revenue.

Fitch said, “Nigeria’s low level of general government debt, forecast to be 14 per cent of the GDP in 2016, is well below the ‘B’ median of 53 per cent and a rating strength.

“However, the fall in general government revenue represents a risk to the country’s debt profile. Fitch estimates general government debt/revenue will rise to 259 per cent in 2016 from 181 per cent in 2015, higher than the 223 per cent median for ‘B’ rated peers. At end-2015, only 19 per cent of the central government debt was denominated in foreign currency.

“Nevertheless, depreciation of the naira will increase the debt and debt service burden. A weak policy response to falling external revenues has led to an increase in external vulnerabilities, slower GDP growth and a widening of the current account deficit.”

On the new forex regime, Fitch said the exclusion of the importers of 41 items from the inter-bank market would continue to hinder growth, capital inflows and investment.

“Fitch expects that some continued intervention in the FX market will reduce international reserves, which were below $27bn before the new market began trading compared with $34bn at end-2014. Fitch expects reserves to fall to 3.4 months cover of current external payments by end-2016.”

Fitch forecasts the GDP growth to fall to 1.5 per cent in 2016, down from 2.7 per cent in the previous year, after it contracted by 0.4 per cent year-on-year in the first quarter, stemming partly from low hard currency liquidity.

“The second half of the year is likely to experience a further contraction, as the resurgence of violence in the Niger Delta has brought oil production levels down to around 1.5 million barrels per day in May, from approximately 2.1 mbpd in January,” it stated.

According to the agency, in the medium to long-term, the move to a more flexible exchange rate mechanism, if implemented effectively, is likely to be supportive of economic growth and rebalancing in the face of the drop in oil revenues.

It said the accompanying depreciation of the naira would also increase foreign currency denominated fiscal revenue in naira terms, adding that the positive effects of naira devaluation would take some time to fully materialise and, but in the meantime, Nigeria would be vulnerable to a number of downside risks.

“Fitch expects the current account deficit to widen to 3.3 per cent of the GDP in 2016, from 2.6 per cent in 2015 and compared with the median of ‘BB’ rated peers at two per cent. Increased external borrowing will reduce Nigeria’s position as a small net external creditor, although this will remain stronger than the ‘B’ range median.”

 

[Punch]