Fitch joins Moody’s in downgrading Nigeria on ‘high debt service’

Another global credit rating agency, Fitch Ratings, has downgraded Nigeria’s long-term foreign-currency issuer default rating (IDR).

Moody’s Investors Service had last month downgraded the country’s local currency and foreign currency long-term IDR to B3 from B2 “driven by the significant deterioration in Nigeria’s government finances as well as its external position”.

Fitch announced on Friday that it cut Nigeria’s foreign currency IDR to ‘B-‘ from ‘B’, saying the outlook is stable.

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“High debt service drives downgrade: The downgrade to ‘B-‘ reflects continued deterioration in Nigeria’s government debt servicing costs and external liquidity despite high oil prices in 2022,” it said in a statement.

The agency said low oil production and the expensive subsidy on petrol had consumed most of the fiscal benefit of high oil prices in 2022 and would continue to stress already low government revenue levels.

“If implemented, subsidy reduction in 2023 would benefit public finances, but constrained oil production and structurally low domestic non-oil revenue mobilisation will limit potential gains,” it said.

Fitch expects that the implicit subsidy on petrol will cost the government approximately NGN5 trillion (2.4 percent of GDP) in foregone revenue from the Nigerian National Petroleum Company in 2022, which will contribute to a widening of the general government (GG) fiscal deficit to 6.1 percent of GDP.

It said: “The foregone revenue stems from the spread between the regulated pump price of petrol, which has averaged N190 per litre, and the import cost, which has averaged above N300 per litre. The Petroleum Industry Act 2021 contains language mandating a move to a market price for refined fuel products, but plans to phase out the subsidy in 2022 were pushed back owing to higher global oil prices.

“In 2023, our base case scenario sees a gradual narrowing of the spread between the pump price and true market price of petrol, which is in line with the government’s proposed 2023 budget. However, we expect a longer timeframe for completely phasing out the subsidy, and therefore a higher level of foregone revenue.”

The agency said a new administration come next year would likely introduce a supplemental budget.

“Although the subsidy reform has broad-based political support, Fitch considers that there will likely be public pressure to continue the fuel subsidy. Lower subsidy costs and a marginal improvement in oil production, will narrow the GG fiscal deficit, but we expect this to remain above 5 percent of GDP in 2023,” it said.

Fitch forecasts Nigeria’s GG debt to increase to 34 percent of GDP by end-2022. This includes the Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria.

It said: “Nigeria’s debt stock is low compared with the forecast 2022 ‘B’ median of 57.6 percent of GDP. However, its debt servicing metrics are among the highest for Fitch-rated sovereigns. We forecast government debt/revenue to increase to 580 percent in 2022 and interest/revenue to reach 47.7 percent, compared with the current ‘B’ medians of 282 percent and 10.8 percent, respectively. Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024.

“At the central government level, Nigeria’s debt metrics are made worse because the FGN holds a higher percentage of GG debt relative to its share of GG revenue. Interest payments reached 108 percent of FGN revenues in 1H22.”

Fitch said Nigeria’s oil production would continue to be weighed down by the combination of oil theft, pipeline vandalism, and aging infrastructure.

“This will limit both GDP growth and government revenue performance. Production levels have been on a downward trend for several years and, after averaging 1.6 mbpd in 2021, fell to 1.2 mbpd in September 2022,” it said.