Petrol subsidy return seen denting Nigeria’s credit rating

The return of petrol subsidy in Nigeria could affect the country’s positive credit ratings, according to multiple analysts who spoke to BusinessDay.

This may be negative for Africa’s most populous nation’s prospects of getting funds from the international bond market and foreign investment needed to achieve its $1 trillion economy target by 2030.

A credit rating is a measure of how likely a company or government entity can pay back its debts, based on an independent assessment of its financial health.

“No serious investor will take us seriously because one of the things that made our credit rating improve is because the rating agencies thought the subsidy was gone. If it is not gone, it downgrades the rating,” Damilare Asimiyu, macroeconomic strategist & head of investment research at Afrinvest West Africa Limited, said.

He added that the government can’t go to the Eurobond market and raise credit at a competitive market rate. “So, your instrument becomes a deeper junk and they won’t give you enough attention.”

Last Wednesday, an Accelerated Stabilisation and Advancement Plan draft report presented by Wale Edun, minister of finance and coordinating minister of the economy, revealed that Nigeria will spend up to N5.4 trillion on petrol subsidy in 2024.

This comes after months of repeated denials by government officials who insisted there was no subsidy.

“At current rates, expenditure on fuel subsidy is projected to reach N5.4 trillion by the end of 2024. This compares unfavourably with N3.6 trillion in 2023 and N2.0 trillion in 2022,” the report said.

The next day, Bayo Onanuga, the president’s special adviser on information and strategy, dismissed the viral document, describing it as unofficial and merely a policy proposal still under review at the highest levels.

“The government wants to restate that its position on fuel subsidy has not changed from what President Bola Tinubu declared on May 29, 2023. The fuel subsidy regime has ended. There is no N5.4 trillion being provisioned for it in 2024, as being widely speculated and discussed,” he said.

Muda Yusuf, chief officer of the Centre for the Promotion of Private Enterprise, said there needs to be full disclosure about the fuel subsidy issue because it is creating a lot of confusion in the economy.

“If there is no subsidy, there is no way you can stabilise prices for close to a year when all the variables that are driving prices have been moving,” Yusuf said.

“Many analysts have been saying there is a subsidy. So, no matter what the government says, those who understand economics know that there is a subsidy,” Yusuf said.

According to Ayokunle Olubunmi, head of Financial Institutions Ratings at Agusto & Co, every economy runs on information and investors make their decisions based on that information.

“The information management of this current administration hasn’t been the best. The situation will also further erode confidence in the information released by those managing the economy and something needs to be done to increase that particular confidence especially for investors,” Olubunmi said.

Tinubu scrapped a costly but popular petrol subsidy and lifted currency controls in the second quarter of last year, which he said was to save the country from collapse.

But his actions have worsened inflation currently in double-digits and at the highest on record. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

The reforms made Standard and Poor’s (S&P), a global rating agency, revise its outlook on Nigeria to stable from negative last August.

In February, the agency still affirmed the country’s outlook position.

“The stable outlook balances the government’s capacity to continue the reform agenda, which, if delivered, should support growth and fiscal outcomes, against below-potential oil production and risks to macroeconomic stability and confidence from inflationary pressures and a volatile currency,” it said in a statement.

Moody’s in December revised the country’s economic outlook to positive from stable, citing a possible reversal of the deterioration in the country’s fiscal and external position due to authorities’ reform efforts.

Another global agency, Fitch, also reviewed Nigeria’s economic outlook to positive from stable last month.

“Consistent lack of clarity could make investors sceptical of government sincerity, making them more cautious about committing resources in the country,” Israel Odubola, a Lagos-based research economist, said.

“That is probably why oil investors are going to other African markets like Angola, and ignoring Nigeria,” he added.

BusinessDay findings showed the landing cost of Premium Motor Spirit (PMS), otherwise known as petrol rose by 88 percent to an average of N1,026.7 per litre in May 2024 from N545.8 per litre, recorded in the corresponding period of 2023.

The landing cost excludes other additional costs which include depot-related charges, transportation logistics and marketers’ margin, which would combine to bring delivery at filling stations at nearly N1,100/litre compared to N529 in July.

This glaring figure raises concerns about the truism of the government’s position on the complete end of the costly subsidy.

“What is, however, surprising is the government not being sincere on the actual demand, which in my estimate is not more than 35 million litres per day,” Kelvin Emmanuel, an economist and CEO of Dairy Hills said.