American credit rating agency, Fitch Ratings Incorporated, Monday lowered Nigeria’s Foreign Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ and consequently assigned a negative outlook to the country.
A rating commentary released by the organisation notes that the escalating pressures on Nigeria’s external revenue sources in the wake of the plunge in oil prices and the COVID-19 outbreak accounts for both the downgrade and negative outlook.
“The plunge in international oil prices, which we assume will average of USD35/barrel in 2020 after USD64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57% of current-account receipts and nearly half of fiscal revenue over the last three years.
“This shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria (CBN) will not suffice to address deteriorating external imbalances, in our view,” Fitch says.
Stability in Nigeria’s macroeconomic condition, according to the statement, is threatened by outside shocks considering that Africa’s largest economy has a weak monetary and exchange rate policy making and lacks fiscal buffers.
Fitch reckons that this vulnerable position will trigger a further increase in government’s debt and interest payment-to-revenue ratios from their currently high levels and cause another recession.
“The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7% since mid-January and devalued the official exchange rate by 15% in March.”
It attributes the persistent pressures on the Naira to the decline in Nigeria’s foreign reserves, which has recorded a 9.4% plunge year to date, translating to a cumulative drop of 22.5% since reaching their high at mid-July 2019.
Fitch affirms that “reversal of international portfolio inflows in a context of a spike in global risk aversion could magnify the impact of the oil price shock. Nigeria’s vulnerability to short-term capital outflows is high given the sizeable stock of portfolio investments in short-term naira debt securities, equivalent to USD27.7billion (6.9% of GDP) at end-2019 and representing around 72% of FC reserves at the time.
“Of these liabilities, USD14.7 billion was in non-resident investments in the CBN’s open-market operation bills that were attracted by high interest rates and hedging instruments offered to non-residents at non-economic costs under the CBN’s policy of stabilising the exchange rate.”