Nigeria’s Long-Term Foreign-Currency Issuer Default Rating was on Monday reviewed downward from B+ to a ‘B’ status with a negative outlook by Fitch Ratings, an American credit rating agency and one of the biggest agencies globally.
The decision reflects ongoing pressure on external reserves due to a slump in oil prices and the COVID-19 pandemic, Fitch said. Nigeria’s foreign reserves declined by 9.4 percent year-on-year, a cumulative fall of 22.5 percent since a peak was recorded in mid-July 2019. Meanwhile, the exchange rate has appreciated by more than 30 percent since 2016, driven mainly by rising inflation which averaged 13.3 percent between 2017 and 2019 due to rigid nominal exchange rates.
Excessive external pressures, uncertain monetary and exchange rate policy, as well as the absence of reliable fiscal buffers, raise the risks of disruption to Nigeria’s macroeconomic adjustment, said Fitch in a report published Monday. The shock is also expected to raise the government’s debt and interest payment-to-revenue rations which are already high and lead to a “renewed economic recession.”
In addition to a new recession, Fitch expects Nigeria’s government to witness a further weakening of its fiscal revenue due to the oil price slump and the near-shutdown of economic activities in the country. The general government deficit was projected to widen by 5.8 percent of GDP in 2020, up from 3.8 percent in 2019.
“The plunge in international oil prices, which we assume will average of USD35/barrel in 2020 after USD64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57 percent of current-account receipts and nearly half of fiscal revenue over the last three years,” the report reads.
More so, the central bank’s recent remedial policy is not enough to address the plunging external reserves and its adjustment policy too small, compared to the nature of the shock that has been witnessed, Fitch added. “The shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria (CBN) will not suffice to address deteriorating external imbalances, in our view.”
The plunging external reserves caused by the oil price crash and coronavirus crisis also put the credit profiles of Nigerian banks at “severe risk,” Fitch said in an earlier report, adding that asset quality deterioration linked to high exposures to the oil and gas sector is the biggest threat to ratings.
Standard & Poor’s credit rating for Nigeria stands at B- with a ‘stable’ outlook while Moody’s credit rating for Nigeria was last set at B2 with a ‘negative’ outlook.
