Fitch expects a currency devaluation by Q1 2016, affirms negative outlook


Friday, October 23, 2015 8:56 AM / FBNCapital

Weak commodity prices and deteriorating public finances were the main drivers behind the sovereign downgrades by Fitch Ratings of Angola and Gabon this year. Both were downgraded to B+ with stable outlook.

This emerged at a briefing we attended in Lagos on Tuesday, hosted by Fitch. Its latest review for Nigeria was carried out in September, and affirmed the country’s BB- rating with a negative outlook. The briefing focused on Nigeria’s credit picture post-election.

Even before oil prices began to slide in June 2014, Nigeria’s buffers (external reserves including the excess crude account) were already depleted. This was one of the reasons that led the agency to maintain the negative outlook. 

In September reserves stood at US$30.3bn; the most recent figure in the public domain for the crude account is US$2.3bn.

Fitch made the point that the risks associated with political uncertainty are subsiding but that they have been replaced with policy uncertainty.

Given the slowdown in growth recorded in Q2 2015, the ratings firm suggested some familiar policy responses to stimulate and sustain growth. Boosting non-oil revenue was one such, and Fitch called for a hike in the standard rate of VAT from 5% to a range of between 10% and 15%. It also highlighted improved efforts by the Federal Internal Revenue Service to capture existing taxes.

Other elements of Fitch’s policy wish-list included:
·         external sector adjustments and curbing structural challenges;
·         a focus on plugging leakages (ahead of increasing oil production);
·         improvements to the business climate in order to attract FDI (which currently stands at less than 1% of GDP);
·         measures to reduce corruption and capital flight; and building policies to encourage import substitution.

Fitch estimates GDP growth this year at 3.6%. This is broadly in line with our own view that Q3 is likely to be no better than Q2’s 2.4% y/y, followed by a modest recovery in Q4. The agency expects the oil price to hold in the US$55-US$60/b range through 2016, and current-account deficits equivalent to -2.3% of GDP this year and -2.1% in 2016. We have a slightly higher oil price and, due to import compression greater than in most estimates, lower deficits.

In line with consensus, Fitch expects a currency devaluation by Q1 2016. Its thinking is that this would be the quickest and most effective policy response to offset the effect of the oil price slide on the economy.

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