BusinessDay
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Fitch downgrade worsens Nigeria’s dollar-debt prospects, shifts attention to multilateral lenders

Nigeria’s hope of raising dollar denominated cash in the euro-bond market to finance its deficit may have finally hit the rocks as rating agency, Fitch downgraded the country’s long-term foreign currency issuer default rating (IDR) to ‘B’ from ‘B+’ with a negative outlook citing external and fiscal pressures. The new rating by Fitch is at par with Moody’s rating at B2 and one notch above S&P rating at “B-“

Credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the creditworthiness of entities. These ratings can impact borrowing costs as a lower rating would mean a higher cost of borrowing for issuers.

 

A ‘B’ rating for long term foreign currency implies that Nigeria, in an adverse business, financial and economic conditions is incapacitated to meet its foreign currency denominated financial obligations with an original maturity of one year or more, as they come due.

 

“This means the government will abandon its foreign currency commercial debt issuance for 2020 and concentrate on effort on getting loans from multilateral agencies,’ Omotola Abimbola a fixed income analyst at Chapel Hill Denham said.

 

Zainab Ahmed, Nigeria’s minister of Finance on Monday also announced plans by the government to raise $6.9billion from multilateral lenders to help in efforts to stop the spread of the coronavirus and counter its impact on the Africa’s largest economy.

“The government will seek $3.4 billion from the International Monetary Fund, $2.5 billion from the World Bank and a further $1 billion from the African Development Bank,” she said

“The intervention is vital to create fiscal space for states as well as the federal government to enable all of us to deal more adequately with the health challenges and economic impact of the crisis,” said Ahmed. The government will also unlock $150 million from its sovereign wealth fund to help provide revenue to state governments,” she said.

In his view, Nonso Obikili, Chief Economist at BusinessDay, the decision to seek IMF support is “unprecedented by Nigerian standards and it’s clear they are very worried about finances going forward,” said Nonso Obikili.

“But this is the easy part” he said. “There are more fundamental macro and fiscal issues that will need to be tackled once the pandemic goes away.” He added.

According to Fitch, the downgrade and negative outlook reflect the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock.

“Intensifying external pressures raise risks of disruptive macroeconomic adjustment given Nigeria’s precarious monetary and exchange rate policy setting and lack of fiscal buffers.

Nigeria’s reserves have depleted to $35.94bn as at March 2020 compared to $52.6billion in 2008. External debt ballooned hitting $26.94bn in 2020 compared to $3.7bn in 2008 and $111.26bn in 2016. The external crude account has also depleted to less than $100milllion in March 2020 compared to more than $15billion in 2008 and less than $5billion in 2016.

The rating agency said the pandemic shock will also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession,” Fitch said in a statement.

Figures from the Debt Management Office (DMO) shows Nigeria’s total debt stock rose to N27.40 trillion in 2019, an increase of around 12.36 percent year-on-year from N24.38 trillion in 2018, Domestic debt grew 10.5 percent to N18.38 trillion in 2019 accounting for 67.07 percent of total debt stock. While Nigeria’s total debt to GDP ratio remained at 19 percent approximately, below the 25 percent debt limit imposed by the government. The total interest payment on domestic debt according to DMO data stood at N1.69 trillion in the year while interest payment on foreign debt stood at $1.33 billion.

 

Fitch warned that the pandemic shock would push the Nigerian economy into recession with GDP contracting by 1percent in 2020. Non-oil GDP will fall, weighed down by spillovers from the oil sector, tighter FC supply and disruptions to economic activity from measures taken to contain the spread of the coronavirus as regions accounting for nearly half of the national economy were put under a two-week lockdown in March.

“We expect GDP to bounce back by 4.4percent in 2021 assuming a gradual normalisation of economic activity and stable oil production but risks around our baseline are tilted to the downside given uncertainty regarding the spread of the pandemic,” Fitch said.

Fitch noted that the plunge in international oil prices, which it expects to average of $35/barrel in 2020 after USD64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57percent of current-account receipts and nearly half of fiscal revenue over the last three years.

Fitch in its view said 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.

The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7percent since mid-January and devalued the official exchange rate by 15percent in March.

Fitch said the continued reluctance by the apex bank to adjust the exchange rate, portfolio outflows and a wide current-account deficit (CAD) will lead Foreign Currency reserves to fall to 2.5 months of current account payments at end-2020 under its forecasts,

“well below the historical ‘B’ median of 3.8 months, and their lowest level since 1994” the report said.

It also predicted that the Current Account Deficit will widen to a record level of 4.9percent of GDP in 2020, exceeding the historical ‘B’ median of 4.3percent, under our assumption of only modest depreciation of the naira.

Nigeria’s long-standing current account surplus shifted to a deficit of 4.2percent of GDP in 2019 on an upsurge in imports, chiefly of equipment goods. We project the CAD to narrow to 1.8percent in 2021 reflecting partial recovery of oil prices to USD45/b, import compression and tighter restrictions on FC access.

The collapse in oil revenues and the slowdown in economic activity will take a toll on the government’s already weak fiscal revenues. This will be partly cushioned by the devaluation of the official exchange rate, which will boost fiscal oil revenues in naira terms. In addition, the fall in international fuel prices will allow the government to eliminate the implicit fuel subsidy. Nigeria’s fiscal breakeven oil price is high, at USD133/barrel under our estimates, given particularly low non-oil fiscal intakes.

Fitch project that the general government (GG) deficit will widen to 5.8percent of GDP (federal government, FGN: 3.1percent) in 2020 from 3.8percent (FGN: 2.4percent) in 2019.

“There is limited scope for consolidation through spending cuts given fiscal rigidity from payroll and interest outlays, which will represent 150percent of the FGN’s revenues and two-thirds of its expenditures in 2020. Cuts to other operational outlays and capital expenditures will be largely offset by higher spending on health services and support to sectors affected by the pandemic shock,” Fitch said.

Low fiscal revenues present a major challenge to debt sustainability. GG debt will edge up to 511percent of revenues (FGN: 1028percent) in 2020 from 371percent (FGN: 717percent) in 2019, rising by five times in eight years and widening the gap with the historical ‘B’ median of 214percent. Relative to GDP, GG debt will stabilise at 31percent (FGN:26percent) in 2020-2021 under our projections, its highest level since the restructuring of the Paris Club debt in 2005, but still below the historical ‘B’ median of 50percent.

We expect the government will cover most of its funding needs on domestic markets in 2020, but could still tap emergency funding facilities of multilateral creditors such as the IMF and the African Development Bank. The government had resorted to monetary financing in 2019 with net CBN claims on the FGN soaring to 4percent of GDP at end-2019, exceeding annual FGN revenues, from nearly 0percent at end-2018.

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