Is a Negative Fitch Outlook a Kiss of Death?

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Tuesday, December 31, 2019 / 11:23 AM / by FDC Ltd / Header Image Credit: Snopes

 

Fitch, a global credit rating agency, has revised downwards its economic outlook for Nigeria from stable to negative. This comes less than 2 weeks after Moody's reduced Nigeria's outlook to negative. The downward revision reflects the country's increasing vulnerability to domestic and external headwinds and foreign investors' growing wariness of the Nigerian economy.

 

Rating Drivers

  • Increasing vulnerability from the current macro-policy setting

  • Central bank's complex regulatory measures

  • Rising debt

  • Low fiscal revenue

  • Rising inflation

 

According to Fitch, Nigeria's macroeconomic challenges are underscored by the increasingly complex regulatory measures taken by the CBN to attract foreign investments in OMO bills and spur bank lending. The agency is of the opinion that low OMO market liquidity is likely to have dampened foreign portfolio investments, contributing to a rapid depletion of external reserves. Fitch also noted that Nigeria's low fiscal revenues and structural shortcomings in public finance management would continue to constrain the federal government's ability to support a rising debt burden. According to Fitch, Nigeria's public debt to revenue ratio is particularly high at 333% and is expected to rise to 400% in 2021. The agency also expects the government debt to exceed 30% of GDP in 2020.

 

Impact of a Negative Rating

The rating downgrade could spook investors' already dampened confidence. Furthermore, we could see an increase in the borrowing costs for Nigerian financial institutions, an increase in interest costs on debt for Nigerians looking to borrow from foreign countries and further pressure on the naira.

 

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