Fitch Ratings has reduced Nigeria’s long-term foreign currency Issuer Default Rating (IDR) from ‘B’ to ‘B-,’ putting Africa’s largest oil producer just six notches above default and on par with Ecuador and Angola. The new report comes only weeks after Moody’s, a worldwide ratings organization, cut Nigeria’s local currency and foreign currency long-term issuer ratings, as well as its foreign currency senior unsecured debt ratings, to B3 from B2. According to Moody’s, the decision was motivated by a considerable worsening in Nigeria’s government finances in 2022, despite a big rise in international crude oil prices.
Following in the footsteps of Moody’s, Fitch, a prominent worldwide rating agency, stated that the new downgrading was due to increased government debt service expenses and deteriorating external liquidity, notwithstanding higher crude prices in 2022, among other factors. It also stated that in the first half of 2022, interest payments on debt stock exceeded government revenue. The organization emphasized that poor oil output and the costly gasoline subsidy absorbed the majority of the fiscal benefits of high oil prices this year and would continue to stress already low government revenue levels.
If the subsidy payment is reduced in 2023, it would aid public finances.
According to Fitch, reducing subsidy payments in 2023 will boost governmental finances. It said, however, that restricted oil output and fundamentally low domestic non-oil revenue mobilization will limit potential advantages. Fitch anticipates the implicit subsidy on petrol will cost the government roughly N5 trillion, or 2.4 percent of GDP, in lost income from the Nigerian National Petroleum Corporation (NNPC) in 2022. According to the research, this is likely to contribute to an increase in the general government fiscal deficit to 6.1% of GDP.
The lost revenue is due to the difference between the regulated pump price of petrol, which has averaged N190 per litre, and the import cost, which is more than N300 per litre. The rating agency stated that the Petroleum Industry Act (PIA) 2021 calls for the use of market prices for refined gasoline products, but that plans to phase out the subsidy in 2022 have been delayed due to rising global oil prices.
The election in February 2023 will bring a new administration.
Fitch noted that the February 2023 election will usher in a new administration, which will almost certainly submit a supplemental budget, and that there will be public pressure to keep the gasoline subsidy in place. According to Fitch, Nigeria’s debt would reach 34% of GDP by the end of 2022. The Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria is included (CBN). Nigeria’s debt stock is low in comparison to the anticipated ‘B’ median of 57.6 percent of GDP in 2022. Its debt servicing indicators, on the other hand, are among the best among Fitch-rated sovereigns.
Additionally, it anticipates that the general election in February 2023 will exacerbate security concerns in oil-producing areas, but that the restart of the Forcados export terminal and the Trans-Niger pipeline could assist to mitigate ongoing losses from theft and vandalism. The report predicted that the current account would shift into a modest surplus in 2022 from a deficit of 0.4% in 2021, noting that while higher oil prices have improved oil export receipts, part of this has been offset by higher fuel imports. The current account has improved, although Fitch predicts that reserves will end 2022 at $36.3 billion, down from $40.2 billion in 2021, and will continue to decline in 2023–2024.
The government faces external debt amortizations of $2.4 billion in 2023.
According to estimates, the government will have to pay $2.4 billion in 2023 and $2.7 billion in 2024 to pay off its foreign debt. These costs will be covered by a combination of reserves withdrawal and additional borrowing from the outside world, most likely in the form of syndicated loans. The total external debt service will account for 11.8% of current external receipts in 2022, down from the median prediction for grade “B” of 18.6%, predicts Fitch. Fitch predicted that the expansion of the service sectors will continue to underpin GDP growth, which it expects to be 3.0% in 2022 and 3.1% in 2023. Similar to what Moody’s had stated, Externally, financial and capital outflows from Nigeria are exceeding the current account surplus, depleting foreign exchange reserves.
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