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Fitch revises Nigeria’s creditworthiness outlook to stable, but fiscal capacity remains weak

Nigerian banks may be worst hit by oil price plunge, coronavirus – Fitch Ratings

International credit rating agency, Fitch Ratings Inc, has reappraised Nigeria’s outlook on long-term foreign currency Issuer Default Rating (IDR), which assesses a sovereign nation or an entity’s creditworthiness and responsibility towards meeting its financial commitments, to stable.

The new commentary reveals an improvement in the degree of uncertainty emerging from the weight of the coronavirus headwinds on Africa’s largest economy.

Prior to the latest review issued by Fitch on Wednesday, Nigeria had maintained a negative rating.

The latest ‘B’ rating assigned by the New-York based firm demonstrates that the country is witnessing feeble fiscal revenues, overdependence on hydrocarbons, relatively weak governance and development indicators alongside a reputation for steep inflationary pressures and consistent inflation.

“These rating weaknesses are balanced against the large size of Nigeria’s economy, low general government debt relative to GDP, small foreign currency indebtedness of the sovereign and a comparatively developed financial system with a deep domestic debt market,” the report said.

There is a likelihood of material default with Nigeria, which the rating acknowledges.

Read also: 417,000 barrels daily cut will aggravate Nigeria’s recession —Fitch

Yet, some amount of safety is available, considering that financial obligations are still being fulfilled even though the chances of persistently meeting this responsibility are threatened by the overall business and economic atmosphere.

Investors’ confidence in the economy could be impaired by foreign exchange control measures of the central bank, Fitch said, and this could in turn trigger Nigeria’s exit from benchmark equity indices, blocking the return of foreign capital inflow.

It will ultimately shift the burden of re-growing reserves to sovereign external borrowing in the face of continued current account deficits.

Fitch anticipates the Nigerian government to bridge its funding gap from 2020 to 2022 through the domestic markets, helped by liquidity sufficiency in financial systems outside the banking sector.

“International reserves will remain under pressure from Current Account (CA) deficits in 2020 and 2021, marking an interruption to a long streak of external surpluses.

“We project Nigeria to record a CA deficit of 3% of GDP in 2020 (forecast ‘B’ median: 5%), versus a 4.2% deficit in 2019, as the contraction in imports and lower outflows of investment income offset a decline in both hydrocarbon exports and remittances (6.5% of GDP in 2017-2019),” it added.

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