Nigeria’s ratings risk downgrade over rising debt and lower revenue

One of the biggest credit rating agencies, Fitch Ratings, in its latest report, said that Nigeria’s global rating is at risk, following a sharp rise in its sovereign debt and a growing finance gap.

The rating agency has disclosed that these could trigger a rating downgrade, as policymakers in Nigeria struggle to deal with the impact of the low oil prices and sharp drop in revenue, caused by the coronavirus pandemic.

Fitch, had in April downgraded Nigeria’s Long Term Foreign Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook. The downgrade and negative outlook in April, reflects the aggravation of ongoing pressures on Nigeria’s external finances following the recent crash of oil prices and the shock due to the coronavirus pandemic.

According to Director at Fitch, Mahmoud Harb, “We have two elements that could lead us to take a negative rating action/downgrade on Nigeria. Aggravation of external liquidity pressures and a sharp rise in government debt to revenue ratio.”

The Federal Government has been under increasing pressure to reduce its debt and stimulate growth after its first quarter current account turned negative, with an overvalued local currency.

The report notes that Nigeria’s external reserve is larger than the funding needs, however, external liquidity strains could increase if foreign investors sell down their portfolio investments in the country, putting pressure on ratings.

Harb said that the debt to revenue ratio for Nigeria is set to deteriorate further to 538% by the end of 2020, from 348% that it was a year earlier before improving slightly next year. The medium debt ratio of ‘B’ rated countries is 350%. He also pointed out that the country’s external reserve could drop to $23.3 billion from $36 billion this year if access to foreign exchange is normalized.

The CBN had restricted access to the foreign exchange since the crash of oil prices and the outbreak of coronavirus pandemic, in order to protect and strengthen the naira.

Fitch, had estimated that Nigeria would need $23 billion to meet its external financing needs this year. This might take the country’s external reserve lower, especially following the stopping of the plans for the country to issue Eurobonds.

Harb said that Nigeria could avoid a ratings downgrade if it improves its finances, reforms its foreign exchange policy and reduce its deficit by boosting non-oil revenues.

However, the borrowing trend by the country seems to continue, with plans by the Federal Government to borrow another $3 billion from the World Bank.

The Federal Government had announced its plan to unify the exchange rate in order to generate more revenue and manage the rate in a sustainable manner. The IMF had always stated that unifying the exchange rate would impact the economy more positively than the multiple exchange rates, which give rise to arbitrage.


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