Fitch Revises Nigeria's Outlook to Stable; Affirms at 'B' Plus

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Monday, November 26, 2018 08:19 AM / Fitch Ratings

 

Fitch Ratings has revised the Outlook on Nigeria's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the rating at 'B+'.

 

Key Rating Drivers

The revision of the Outlook on Nigeria's Long-Term IDRs reflects the ongoing economic recovery and decreasing external vulnerabilities, both supported by increased oil production and higher global oil prices. 

Despite setbacks, the Nigerian economy is continuing its slow recovery from the recession that ended in early 2017. Non-oil growth has been supported by an increase in the supply of foreign exchange and will receive an additional boost as the government begins its delayed implementation of the 2018 capital budget. Political uncertainty ahead of the general election scheduled for February 2019 may lead to some weakening in growth, but we expect any disruption to be short-lived. The contribution of the oil sector has been positive in 1H18 as oil production, including condensates, has averaged just below 2.1 million barrels per day (mbpd), compared with 1.9 mbpd in 2017. Fitch expects average production to remain around 2.1 mbpd through 2018 and 1H19. 

Fitch forecasts GDP growth of 2.0% overall in 2018, increasing to 2.5% in 2019 and 3.3% in 2020, and the agency expects that Nigeria's medium-term growth will average around 4.0%. Oil production will increase as new exploration and oil infrastructure projects begin to come online, but Nigeria will struggle to raise production to the levels envisaged in the 2019-2021 Medium Term Expenditure Framework (MTEF). 

High inflation has been a rating weakness, but CPI growth slowed to 11.3% yoy in September 2018, down from a recent peak of 18.7% in January 2017. Inflation fell rapidly in 1Q18, but disinflation has slowed since, as base effects fade and conflicts between herders and farmers affect food supplies. Fitch expects that annual average inflation will fall, but remain in the double digits through 2019. Despite falling inflation, Fitch expects that the Central Bank of Nigeria (CBN) will move towards tighter monetary policy to support FX rate stability. The CBN has kept the monetary policy rate at 14% since May 2016, but has conducted monetary policy through its sales of Open Market Operation bills and by managing the reserve ratio. 

Foreign currency availability has improved although Fitch believes that it remains a constraint on economic growth. The CBN continues to operate an FX regime with multiple windows and exchange rates, which will not change before the general elections. However, the wholesale interbank FX rate has depreciated, bringing it closer to the rate at the Investors and Exporters window. 

Nigeria has increased its stock of international reserves to USD44.6 billion (7.2 months of current external payments) as of September 2018, from USD37.9 billion at end-2017. The accumulation of reserves has been a function of both an increase in oil export receipts and an increase in inflow of foreign investments. Nigeria's external flows are exposed to global risk sentiments as well as to investor's views on Nigeria's political and fiscal developments. However, the build-up of reserves provides a substantial external buffer. 

Nigeria's 'B+' IDRs also reflect the country's position as Africa's largest economy and its well-developed domestic debt markets, balanced against low levels of domestic revenue mobilisation and of GDP per capita, a high level of hydrocarbon dependence, and low rankings on governance and business environment indicators. 

Nigeria continues to run persistent fiscal deficits at both the central and general government levels. Fitch forecasts a general government deficit of 4.3% of GDP in 2018, approximately the same as 2017. The government's 2019-2022 Medium Term Expenditure Framework envisages a decrease in expenditure following three straight years of increasing capital expenditure. Lower expenditure, as a percentage of GDP, will help the general government fiscal deficit to narrow to 4% of GDP in 2019, but the government will continue to experience difficulty in raising non-oil domestic revenue. Oil revenue has increased since hitting bottom in 2016, but volatile production levels and inefficiencies within the petroleum sector have limited the transmission of higher oil prices to higher government revenue. 

Nigeria's general government debt will rise to 292% of revenue, well above the historical 'B' median of 205% of revenue, reflecting the accumulation of new debt and the lack of progress on raising government revenue. At 20% of general government revenue, interest payments are already more than twice the 'B' median. Federal government interest expenditure to federal government revenue stands much higher at just below 60%. 

Fitch forecasts Nigeria's current account (CA) surplus to widen to 3.6% of GDP in 2018 as oil export receipts have grown thanks to high oil prices. The CA surplus will narrow in subsequent years as import growth increases following several years of import compression related to tight foreign exchange supply. Nigeria is a net external creditor equivalent to 12% of GDP in 2018. 

Fitch considers that the easing of foreign-currency liquidity has reduced risks regarding Nigerian banks' ability to meet dollar liabilities and external debt repayments. However, economic headwinds have continued to affect asset quality. Average industry NPLs (according to CBN data) increased to 15% at end-2017, reflecting the lag affect from 2015. NPLs are concentrated in the oil and gas sector. The ongoing economic recovery, higher oil prices and widespread loan restructuring is likely to moderately help asset quality, but high NPLs will weigh on private sector credit provision. Credit to the private sector returned to modest positive growth in 2018 after tight domestic liquidity and crowding out from government borrowing led to a contraction of 5% through November 2017. 

The outcome of the upcoming general elections remains uncertain. President Buhari will face a strong challenge from former Vice President Atiku Abubakar, who won the October 2018 primary to be the People's Democratic Party candidate. Abubakar has made limited statements regarding his economic policy platform, but has criticised the current FX regime and has also signalled his support for devolving more control over public finances to the state governments. If Buhari is re-elected, we expect his government to continue implementing the economic programme outlined in the Economic Recovery and Growth Plan released in March 2017. Fitch does not expect widespread disruption or instability around the election. However, a flare-up of violence in the Niger Delta around the elections presents downside risk to the fiscal, external and GDP growth forecasts.

 

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, but did apply the QO, relative to rated peers, as follows:

  • External Finances: +1 notch, to reflect Nigeria's position as a net external creditor with sovereign net foreign assets well above the 'B' median.
  • Public Finances: -1 notch, to reflect Nigeria's poor fiscal framework, fiscal rigidities, and low domestic revenue mobilisation. Fitch also added the -1 notch to reflect the view that Nigeria's debt/GDP level does not fully capture risks to debt sustainability related to the high debt/revenue ratio.

 

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.

 

Rating Sensitivities

The main factors that could lead to positive rating action are:

  • A reduction of the fiscal deficit and the government debt/revenue ratio.
  • Implementation of structural reforms and macroeconomic policy adjustments that increase economic growth potential.

 

The main factors that could lead to negative rating action are:

  • Failure to achieve a sustainable fiscal consolidation leading to a marked rise in the government debt/revenue ratio.
  •  A loss of foreign exchange reserves that increases vulnerability to external shocks.
  • Worsening of political and security environment that reduces oil production for a prolonged period.

 

Key Assumptions

Fitch's forecasts are for Brent crude to average USD70/b in 2018 and USD65/b in 2019, based on the Global Economic Outlook published in September 2018. 

The full list of rating actions is as follows: 

Long-Term Foreign-Currency IDR affirmed at 'B+'; Outlook revised to Stable from Negative

Long-Term Local-Currency IDR affirmed at 'B+'; Outlook revised to Stable from Negative

Short-Term Foreign-Currency IDR affirmed at 'B'

Short-Term Local-Currency IDR affirmed at 'B'

Country Ceiling affirmed at 'B+'

Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'B+'


Proshare Nigeria Pvt. Ltd.


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