Fitch Affirms Nigeria at ''B''; Outlook Stable

Proshare

Friday, March 19, 2021   /11:23 AM / By Fitch Ratings  / Header Image Credit: Getty Images



Proshare Nigeria Pvt. Ltd.



Fitch Ratings has affirmed Nigeria's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'B' with a Stable Outlook.

 

Key Rating Drivers

Nigeria's 'B' rating is supported by the large size of the economy, a low general government (GG) debt-to-GDP ratio, small foreign-currency (FX) indebtedness of the sovereign and a comparatively developed financial system with a deep domestic debt market. The rating is constrained by particularly weak fiscal revenue, comparatively low governance and development indicators, high dependence on hydrocarbons and continued weak growth and high inflation.

 

Nigeria continues to contend with external liquidity pressures that were magnified by the 2020 pandemic-related shock and resilience to adverse external developments is weak. Despite gradual and moderate exchange-rate depreciation over the last year, the naira remains overvalued. Persistent double-digit inflation under a tightly managed multiple-window exchange-rate regime could drive further misalignment of the currency relative to fundamentals. We forecast inflation to average 16.0% in 2021 and 13.4% in 2022, driven by a number of cost-push factors.

 

Currency overvaluation will hamper a correction of external imbalances. Nigeria's long-standing current account (CA) surplus shifted to a deficit of 4.2% of GDP in 2019, driven by a fast rise in imports. We estimate a stable CA deficit of 4.2% of GDP in 2020, as import compression from domestic demand contraction and restrictions on FX access offset a slump in hydrocarbon exports and remittances. The CA deficit will narrow to an average of 1.6% of GDP in 2021-2022, much smaller than the forecast average median of 4.3% for the 'B' rating category, supported by the recovery in oil prices.

 

Downward pressures on the naira and continued CA deficits could strain international reserves, amid a subdued outlook for FDI and portfolio inflows. At their current level, international reserves would cover five months of the forecast current account payments in 2021, better than the forecast 'B' median of 4.2 months. Government plans to enhance external concessional borrowing and a possible sovereign Eurobond issuance could support FX reserves.

 

The Central Bank of Nigeria (CBN) estimates it has cleared through spot and forward FX sales most of the backlog of FX demand by foreign portfolio investors, which it evaluates at around USD2 billion. However, Fitch believes a backlog of FX demand for imports and capital repatriation will still constitute a sizeable drain on reserves should FX supply normalise. Continued FX restrictions could protect reserves, but protracted hard-currency scarcity would harm production, spur inflation and forestall a recovery in international investor confidence.

 

The outlook for public finances is mostly a function of oil revenues, given the low level of non-hydrocarbon fiscal receipts, while there is little leeway to further reduce spending. We foresee little progress on boosting tax revenue in the medium term due to compliance issues, administrative capacity challenges and resistance to the phasing out of tax credits.

 

We forecast a narrowing in the GG deficit to 4% of GDP in both 2021 and 2022, from 6.3% in 2020, better than the forecast 'B' median of 7% and 4.8%, respectively. The improvement in the fiscal deficit will be driven by the rebound in oil prices to well above the level assumed in the 2021 budget and the revival in economic growth. A USD10 change in the oil price per barrel relative to our baseline would affect the GG balance by around 0.5% of GDP, while a 10% change in annual average oil production would impact the GG deficit by 0.3% of GDP.

 

Social resistance to the ongoing reforms of costly energy subsidies raises risks to our budget forecast, as similar reforms have been reversed in the past due to social pressures. The government has so far held to its March 2020 commitment to the full elimination of the implicit fuel-price subsidy, but retail prices are yet to be adjusted to the rise in benchmark prices in 2021, which could mark a de facto return of the implicit subsidy. Stiff labour union opposition has also delayed a further adjustment of electricity tariffs, which are unlikely to reach cost-recovery levels in 2022 as targeted by the government, in our view.

 

GG debt will further rise to 32.6% of GDP in 2022, from less than 13% a decade earlier, but will remain much below the forecast 'B' median of 70%. The key challenge to debt sustainability stems from low fiscal revenue. The GG debt-to-revenue ratio will rise to 395% in 2022 on our forecasts, versus a forecast 'B' median of 325%. Debt interest cost will consume 24% of revenue in 2022, against a 'B' median of 11%. The picture is much weaker at the federal government (FGN) level, with forecast debt-to-revenue and interest-to-revenue ratios of 1,031% and 64%, respectively, in 2022, reflecting a higher share of the FGN in GG spending and debt than in GG revenue.

 

The government has plans to securitise the loans it contracted under CBN's Ways and Means (W&M) facility in recent years. Government borrowing from the CBN since 2015 has led to the accumulation of a NGN13.2 trillion (8.6% of GDP) balance under the W&M facility end-September 2020, representing around 28% of the total GG debt stock, by our estimates. Repeated recourse to large central bank financing could complicate macroeconomic management and hinder the central bank's ability to tame inflation, particularly if it exceeds limits set under existing institutional safeguards, in our view.

 

The authorities have not solicited any relief under the G20's Debt Service Suspension Initiative (DSSI). The benefit from joining the initiative in 2021 would be small. We do not expect the government to request any debt relief under the G20's Common Framework as the authorities attach high importance to access to international markets.

 

Average growth in 2020-2021 will be in line with rating peers. We expect GDP to grow by 2% in 2021, following an 1.8% contraction in 2020, reflecting favourable base effects and the rise in oil prices. The recovery will be held back by FX scarcity, infrastructure gaps, electricity outages and security-related disruptions. The long-awaited Petroleum Industry Bill is currently being examined by parliament. If approved, it could improve the medium- to long-term outlook for investment in the oil sector, which continues to be clouded by insecurity and governance challenges.

 

ESG-Governance: Nigeria has an ESG Relevance Score of '5' for both Political Stability and Rights and Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators have in our proprietary Sovereign Rating Model.


Proshare Nigeria Pvt. Ltd. 


Rating Sensitivities

The main factors that could, individually or collectively, lead to positive rating action/upgrade are:

 

  • External Finances: Stronger resilience of external finances from a durable recovery in international reserves or resumption of current account surpluses, and exchange-rate regime reform addressing Nigeria's ongoing external vulnerability.
  • Public Finances: Credible path to stronger mobilisation of domestic non-oil revenues sufficient to significantly lower the particularly high debt- and interest-to-revenue ratios.
  • Macroeconomic performance: A broad and sustainable improvement in the macroeconomic picture, with stronger economic growth supporting a recovery in GDP per capita and a durable moderation in inflation towards the central bank's target.

 

The main factors that could, individually or collectively, lead to negative rating action/downgrade:


  • Public Finances: Failure to address weaknesses in the fiscal policy framework, illustrated by a reinstatement of the fuel price subsidy or continued large central bank financing of the sovereign, particularly if it exceeds institutional safeguards.
  • External Finances: Significant intensification of external liquidity pressures, for example, illustrated by a rapid drawdown in reserves or renewed downturn in oil prices.

 

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch's proprietary SRM assigns Nigeria a score equivalent to a rating of 'B' on the Long-Term Foreign-Currency (LT FC) IDR scale.

 

Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.

 

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

 

 

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance.

 

Key Assumptions

We expect global economic trends to develop as outlined in our most recent Global Economic Outlook published on 17 March. We project Brent oil prices to average USD58/barrel in 2021 (FGN budget assumption: USD40/barrel) and USD53/barrel in 2022. We expect Nigeria's oil production volume to average 1.87 mbpd in 2021 (FGN budget assumption: 1.86 mbpd) and 1.95mbpd in 2022, up from 1.76 mbpd in 2020, assuming compliance with the production ceilings stipulated under the most recent OPEC+ agreement.

 

We assume that the authorities will not request debt relief under the G20's Common Framework, reflecting the high importance they attach to international market access.

 

References for Substantially Material Source Cited as Key Driver of Rating

The principal sources of information used in the analysis are described in the Applicable Criteria.

 

Nigeria does not publish consolidated fiscal data on a general government basis, which complicates the assessment of fiscal performance. However, Fitch is able to produce its own estimates for general government fiscal metrics that are broadly consistent with and comparable with the data used for other sovereigns, providing sufficient information to maintain the rating. These estimates are based on disaggregated data on federal, state and local government revenue, spending and debt published by the Nigerian National Petroleum Corporation, the CBN, the Debt Management Office, the Budget Office of the Federation and the National Bureau of Statistics. Fitch has sufficient confidence in these estimates to maintain the rating and the rating level further mitigates residual uncertainty on the accuracy of Fitch's estimates.

 

Proshare Nigeria Pvt. Ltd. 



ESG Considerations

Nigeria has an ESG Relevance Score of '5' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's Sovereign Rating Model. This is highly relevant to the rating, and a key rating driver with a high weight.

 

Nigeria has an ESG Relevance Score of '5' for Rule of Law and Institutional and Regulatory Quality, as World Bank Governance Indicators have the highest weight in Fitch's Sovereign Rating Model. This is highly relevant to the rating, and a key rating driver with a high weight.

 

Nigeria has an ESG Relevance Score of '4' for Human rights and Political Freedoms, as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.

 

Nigeria has an ESG Relevance Score of '4' for Creditors Rights, as willingness to service and repay debt is a rating driver for Nigeria, as for all sovereigns.

 

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity.


Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd. 

Related News - Rating Agencies on Nigeria

1.       Moody's - Nigeria's Deficit and Debt to Stay High After Coronavirus and Oil Shocks

2.      Moody's Takes Ratings Actions on 32 Banks in Africa Following Update to Country Ceilings Methodology

3.      Moody's Announces Changes in Country Ceilings Following Methodology Update

4.      Fitch Revises Nigeria's Outlook to Stable, Affirms at 'B'

5.      S and P Global Ratings Affirmed Nigeria's Long-Term Rating At 'B-'; Outlook Stable

6.      Moody's Announces Completion of a Periodic Review of Ratings of Nigeria

7.      Nigeria's Oil Output Cap to Weigh on Growth, External Finances

8.     Moody's Affirms Nigeria's B2 Ratings, Maintains Negative Outlook

9.      Fitch Downgrades Nigeria to 'B'; Outlook Negative

10.  Nigeria Long-Term Rating Lowered To ''B-'' On Weakening External Position

11.   Nigeria's Outlook Revised To Negative On Falling Foreign Exchange Reserves

12.  Moody's Announces Completion of a Periodic Review of Ratings of Nigeria

13.  Fitch Revises Outlook on Nigeria to Negative; Affirms at 'B plus'

14.  Moody's Changes Nigeria's Sovereign Ratings Outlook to Negative From Stable; Affirms The B2 Ratings

15.  Fitch Affirms Nigeria at 'B plus'; Outlook Stable

 

Proshare Nigeria Pvt. Ltd. 


Related News - Rating Agencies on Banks

1.       Fitch Rates Ecobank Nigeria Limited at 'B-'; Outlook Stable

2.      Fitch Revises Coronation Merchant Bank's Outlook to Stable; Affirms IDR at 'B-'

3.      Risks to Nigerian Banks' Asset Quality Loom in 2021 and Beyond

4.      Fitch Revises UBA Senegal's Outlook to Stable; Affirms at 'B-'

5.      Fitch Affirms Union Bank of Nigeria Plc at 'B-'; off RWN; Outlook Negative

6.      Fitch Affirms First City Monument Bank at 'B-' Stable; off Rating Watch Negative

7.      Fitch Affirms Sterling Bank at 'B-' Stable; off Rating Watch Negative

8.     Fitch Maintains Wema Bank''s Long-Term IDR of ''B-'' on Rating Watch Negative

9.      Fitch Revises Bank of Industry's Outlook to Stable; Affirms IDR at 'B'

10.  Fitch Affirms Fidelity Bank at 'B-'; off Rating Watch Negative; Outlook Stable

11.   Fitch Affirms Access Bank at 'B'; off RWN; Outlook Negative

12.  Fitch Affirms UBA at 'B'; off RWN; Outlook Stable

13.  Fitch Affirms Zenith Bank at 'B'; Off Rating Watch Negative, Outlook Stable

14.  Fitch Affirms Guaranty Trust Bank at 'B'; off RWN; Outlook Stable

15.  Fitch Affirms FBN Holdings Plc at ''B-''; off RWN; Outlook Negative

16.  S and P Global Ratings Affirmed First Bank of Nigeria Ltd Ratings, Outlook Stable

17.   Fitch Affirms Coronation Merchant Bank's Rating at B-

18.  Fitch Rates Coronation Merchant Bank Limited at ''B-''; Outlook Negative

19.  Moody's Announces Completion of a Periodic Review of Ratings of Union Bank of Nigeria Plc

20. Moody's Announces Completion of a Periodic Review of Ratings of Sterling Bank Plc

21.  Moody's Announces Completion of a Periodic Review of Ratings of Access Bank Plc

22. Moody's Announces Completion of a Periodic Review of Ratings of Fidelity Bank Plc

23. Moody's Announces Completion of a Periodic Review of Ratings of FCMB Limited

24. Moody's Announces Completion of a Periodic Review of Ratings of First Bank of Nigeria

25. Moody's Announces Completion of a Periodic Review of Ratings of Zenith Bank Plc

26. Moody's Announces Completion of a Periodic Review of Ratings of Guaranty Trust Bank Plc

27.  Moody's Announces Completion of a Periodic Review of Ratings of UBA Plc

28. Moody's Announces Completion of a Periodic Review of Ratings of Bank of Industry

29. Moody's Announces Completion of a Periodic Review of Ratings of Bank of Industry

30. Coronavirus Shock Likely to Reduce Some Banks' Capital, Increase Credit Vulnerabilities

31.  Fitch Maintains Access Bank's 'Aplus (nga)' National Long-Term Rating on RWN

32. Fitch Revises 2 Nigerian Banks' National Ratings

33. Banking System Outlook Update - Nigeria Outlook Changes to Negative Due to Oil Price Collapse

34. Various Rating Actions On Nigerian Banks By S and P Following Sovereign Downgrade; Outlooks Stable

35. Nigerian Banks at Severe Risk from Oil Price Slump, Coronavirus

36. Fitch Downgrades 3 Nigerian Banks to 'B', Places All 10 Banks on Negative Watch

37.  Outlooks On Six Nigerian Banks Revised To Negative After Same Action On Sovereign

38. Fitch Revises Outlook on UBA Subsidiaries to Negative on Parent Action

39. Fitch Revises Outlook on 4 Nigerian Banks to Negative on Sovereign Action

40. Moody's Affirms Bank of Industry Ratings, Changes Outlook to Negative from Stable

41.  Moody's Affirms Ratings of Nigerian Banks Following Action On The Nigerian Government

42. Fitch Affirms Union Bank of Nigeria Plc at 'B-'; Outlook Stable

43. Fitch Affirms Stanbic IBTC Bank at 'AAA(nga)'

44. Fitch Affirms Zenith Bank Plc at 'B' plus; Outlook Stable

45. Fitch Affirms Bank of Industry at 'B' plus; Outlook Stable

46. Fitch Affirms United Bank for Africa PLC at 'B' plus; Outlook Stable

47.  Fitch Affirms Access Bank at 'B'; Stable Outlook

48. Fitch Affirms Guaranty Trust Bank at 'B' plus; Stable Outlook

49. Fitch Revises Outlook on FBNH to Stable; Affirms at 'B-'

50. S and P Global Ratings Affirmed ETI And Ecobank Nigeria Ltd Ratings; Outlook Stable

51.  Fitch Rates Access Bank's Tier 2 Subordinated Debt Final 'A(nga)'

52. Fitch Affirms Ecobank Transnational Inc at 'B'; Outlook Stable

53. Access Bank 'B and B' Ratings Affirmed; Outlook Stable

 

Proshare Nigeria Pvt. Ltd. 


Related News - Rating Agencies on Selected Companies and Notes

1.       S and P Global Ratings Affirmed African Reinsurance Corp 'A-' Ratings; Outlook Stable

2.      Fitch Affirms Seplat at 'B-'; Outlook Positive

3.      Fitch Revises IHS's Outlook to Stable; Affirms at 'B'

4.      Moody's Announces Completion of a Periodic Review of Ratings of Dangote Cement Plc

5.      Moody's Announces Completion of a Periodic Review of Ratings of Interswitch Limited

6.      Moody's Announces Completion of a Periodic Review of Ratings of Interswitch Limited

7.      Moody's Announces Completion of a Periodic Review of Ratings of SEPLAT

8.     Moody's Assigns Ratings to Dangote Cement Plc's DMTN Program and Proposed Series 1 Notes

9.      Rating Actions Taken On Several Corporate Issuers With Exposure To Nigeria

10.  Fitch Affirms Bharti Airtel at ''BBB-''; Off Watch Negative; Outlook Stable

11.   Fitch Revises IHS's Outlook to Negative; Affirms at 'B plus'

12.  Moody's Affirms Interswitch's Ratings; Outlook Remains Stable

13.  Moody Changes Ratings for IHS, Seplat and DANGCEM Following Negative Rating on Sovereign Outlook

14.  Moody's Assigns B2 Corporate Family Rating To Interswitch Limited; Outlook Stable

 

Proshare Nigeria Pvt. Ltd. 


Related News - Rating Agencies on Kaduna State

1.       Fitch Revises Kaduna's Outlook to Stable on Sovereign Action; Affirms at ''B''

2.      Fitch Revises Outlook on Kaduna State to Negative on Sovereign Rating Action; Affirms at 'B'

3.      Fitch Affirms Nigeria's Kaduna State at ''B''; Outlook Stable - Oct 11, 2019

4.      Fitch Affirms Nigeria's Kaduna State at 'B'; Outlook Stable - May 04, 2018


Proshare Nigeria Pvt. Ltd. 


Related News - Rating Agencies on Lagos State

1.       Fitch Revises Lagos's Outlook to Stable on Sovereign Action; Affirms at 'B'

2.      Fitch Downgrades Lagos State to 'B' on Sovereign Rating Action; Outlook Negative

3.      Fitch Affirms Nigeria's Lagos State at 'B plus'; Outlook Stable

4.      Global Credit Rating (GCR) Downgrades Lagos State's Environmental Municipality Note

5.      Fitch Affirms Lagos State at 'B' Plus; Outlook Stable

6.      Fitch Affirms Nigeria's Lagos State at ''B ''; Outlook Negative


Proshare Nigeria Pvt. Ltd.

READ MORE:
Related News
SCROLL TO TOP