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Tuesday, April
07, 2020 / 09:05 AM / FBNQuest Research / Header Image
Credit: Ecographics
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Fitch yesterday downgraded Nigeria's sovereign credit rating (long-term, foreign currency) by one notch from B+ to B, and maintained the negative outlook. This brings Fitch into line with S&P and is surely warranted as Nigeria faces the crashing oil price and the coronavirus pandemic with limited, and shrinking external buffers. Fitch's numbers rest upon average oil prices of US$35/b this year and US$45/b in 2021, and the CBN's "continued reluctance to adjust the exchange rate".
In the absence of a full range of forecasts, we take this last phrase to mean that the central bank will make/engineer rate adjustments in small steps, and when it has no alternative. (This has been our thinking throughout).
On this basis, Fitch has GDP contraction of -1.0% this year, a current-account deficit at 4.9% of GDP, gross reserves providing 2.5 months' cover for current-account payments (goods, services and income) at end-year and a FGN fiscal deficit equivalent to 3.1% of GDP. These forecasts (other than growth) would place Nigeria below the median for its new peer group of B-rated sovereigns.
Fitch notes that the average oil price this year and next may fall short of its forecasts. Under its oil production expectation of 2.1mbpd, a further fall of US$10/b would equate to a widening of the current-account deficit/GDP by another 160bps.
It quotes data showing offshore holdings of OMO bills at US$14.7bn equivalent at end-December. This tallies with S&P's estimate of US$12bn in February.
Fitch has general government debt at 31% of GDP in 2020-21, and FGN debt at 26%. While this would be the highest ratio since the Paris Club restructuring of 2005 according to the agency, it would compare very favourably with the median 50% for the B-rated group.
We assume that these forecast debt/GDP ratios, in line with widespread practice, exclude net CBN claims on the FGN estimated at 4% of GDP at end-2019.
Fitch expects the government to meet most of its funding needs domestically this year, and so echoes a common feeling that the FGN would ideally have tapped the Eurobond market before the onset of the global headwinds. It acknowledges that it could secure emergency multilateral funding. The FGN has since gone down this last route with yesterday's appeal for US$6.9bn support from the Washington duo and the African Development Bank.
The market impact of this rating action will be limited since Fitch has merely fallen into line with the two other agencies.
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