Monday, June 27 2016 12:15PM /FBNQuest Research
On Thursday Fitch downgraded its sovereign rating for the FGN’s external, long-term, foreign currency obligations from BB- to B+, and assigned a stable outlook. It therefore falls into line with Moody’s Investors Service (Good Morning Nigeria, 10 May 2016) as well as Standard and Poor’s.
While we take no issue with the decision, we are perplexed by the timing in the week of the launch of the new exchange-rate policy. A downgrade before the change in policy or after an interval to judge the new system in operation would have made more sense in our view.
Fitch argues that the new policy is not wholly flexible, citing the need for importers to turn to the parallel market for the 41 items covered by the CBN circular of June 2015. It sees the circular as hindering growth and investment.
We would say that the exchange-rate policy underpins the circular and the administration’s import substitution agenda because it adds further to the cost of imports and encourages domestic production. If the FGN had embraced the agenda many years earlier and contributed meaningfully to the diversification of FGN revenues and fx inflows, the slide in the oil price would have been rather less painful.
Fitch puts general government debt at 14% of GDP at end-2016, compared with the median of 53% for B-rated sovereign peers. It takes a pessimistic view on the FGN’s revenue generation despite the many initiatives (which it lists), forecasting a worsening in the general government debt/revenue ratio to 259% this year from a provisional 181% in 2015.
We are surprised that Fitch sees GDP growth of 1.5% this year. The economy contracted in Q1, and a repeat is anticipated for the current quarter by the federal finance minister and Fitch itself in the light of the heightened sabotage of oil installations in the Niger Delta. For the full year we expect a contraction of -1.2%.
Fitch forecasts inflation at below 12.0% y/y at end-year. We do not know its estimate for the naira in December but have the exchange rate at N300 per US dollar and inflation at 18.0%.
The downgrade is warranted in our view by the deterioration in fundamentals, the oil price slide and the time required for the FGN’s medicine to work.
Fitch provides some reassurance for the banking industry. Its base case is that the regulatory capital ratios will not deteriorate much as a result of the de facto devaluation. Fitch points to the banks’ still strong profitability and internal capital generation in this context.
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