In its latest report, Fitch Ratings has revised Nigeria’s debt rating outlook from stable to positive, attributing the change to the faster-than-anticipated reforms progress since President Bola Tinubu took office in May 2023. The positive outlook is also a result of the reforms implemented to promote macroeconomic stability and strengthen policy coherence and credibility over the past year, according to a statement by Fitch. Nigeria’s foreign-currency issuer default rating of ‘B-‘ was confirmed, indicating the country’s long-term stability in international financial markets.
The ratings agency had previously highlighted issues such as poor governance, Security problems, rising inflation, low non-oil revenue, heavy reliance on oil, and exchange rate weaknesses as factors limiting Economic Growth in the country. However, they were hopeful that Tinubu would implement reforms that would attract investment, unlike previous administrations who followed unorthodox policies. Since taking office a year ago on May 29th, Tinubu has implemented several policy reforms, such as slashing expensive fuel and Electricity Subsidies and deregulating the Naira exchange rate.
Government’s fiscal outlook has been enhanced.
Moreover, the Nigerian government has made changes to exchange rates and monetary policy, decreased fuel subsidies, enhanced collaboration between the Finance ministry and the Central Bank of Nigeria (CBN), reduced central bank funding for the government, and implemented multiple measures to improve administrative efficiency in order to boost Government Revenue and oil production levels. The government’s fiscal outlook has been enhanced by a nearly 70 percent depreciation and reduced subsidies, resulting in increased naira income.
These reforms implemented have been met with enthusiasm by investors, as Nigerian stocks have surged to an all-time high and dollar bond yields have decreased. By addressing distortions caused by past unorthodox monetary and exchange rate strategies, the reforms have led to a significant increase in inflows to the official foreign exchange market. However, the rating agency remains cautious about the near future, citing concerns such as soaring inflation, ongoing instability in the foreign exchange market, and the uncertainty surrounding the government’s dedication to implementing reforms.
Nigeria’s rating is upheld by its liquid domestic debt market.
Increased formalization in foreign exchange operations and stricter Monetary Policy have led to a notable increase in foreign portfolio investments coming into the country. This has resulted in a rapid strengthening of the naira at the official exchange rate window, after experiencing a 71% depreciation from June 2023 to mid-March 2024 when regulations were eased. Despite this, the exchange rate continues to fluctuate unpredictably. Fitch believes that the lack of clear information on the exact amount of net FX reserves is holding back the sovereign’s credit profile. According to the firm, Nigeria’s rating is upheld by its robust economy, well-established and liquid domestic debt market, and abundant oil and gas reserves.
When compared to its peers, the country faces challenges such as poor governance indicators, heavy reliance on hydrocarbons, limited capacity for crude oil production, low foreign exchange reserves, high inflation, persistent security issues, and a non-oil Revenue that is slowly increasing. Fitch expects the CBN to raise the monetary policy rate again in the second half of 2024, following a 600 basis point hike to 24.75% in February 2024. Additionally, they predict an improvement in the transmission of monetary policy, as open market operations have recently resumed at rates that closely match the MPR.
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Inflation is expected to remain high in the coming years, with rates reaching 33.2% year on year in March. The projected averages for Inflation are 26.3% in 2024 and 18.2% in 2025, significantly higher than the projected ‘B’ median of 4.5%. Fitch anticipates the budget deficit to increase by 0.3pp in 2024 to 4.5% of GDP, a slight improvement from the previous projection. Despite this, there is a projected increase of 2pp in general government (GG) revenue/GDP from 2023 to 2025, reaching 9.6%. This growth is attributed to the improved collection of non-oil Tax revenue, resulting in a reduction of the budget deficit to 4.1% by 2025.