Nigeria’s hope of raising dollar-denominated cash in the Eurobond 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 announced plans by the government to raise $6.9 billion from multilateral lenders to help in efforts to stop the spread of the coronavirus and counter its impact on 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,” Ahmed said.
Nonso Obikili, chief economist at BusinessDay, said the decision to seek IMF support is “unprecedented by Nigerian standards and it’s clear they are very worried about finances going forward”.
“But this is the easy part. There are more fundamental macro and fiscal issues that will need to be tackled once the pandemic goes away,” he said.
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 $52.6bn 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 $100 million in March 2020 compared to more than $15 billion in 2008 and less than $5 billion in 2016.
The rating agency said the pandemic shock would also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession.
Figures from the Debt Management Office (DMO) show 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. 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 1 percent 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 4.4 percent 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 57 percent 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 I&E Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7 percent since mid-January and devalued the official exchange rate by 15 percent 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”.
It also predicted that the Current Account Deficit would widen to a record level of 4.9 percent of GDP in 2020, exceeding the historical ‘B’ median of 4.3 percent, under its assumption of only modest depreciation of the naira.
Nigeria’s long-standing current account surplus shifted to a deficit of 4.2 percent of GDP in 2019 on an upsurge in imports, chiefly of equipment goods. We project the CAD to narrow to 1.8 percent in 2021 reflecting partial recovery of oil prices to $45/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 $133/b under our estimates, given particularly low non-oil fiscal intakes.
Fitch projects that the general government (GG) deficit will widen to 5.8 percent of GDP (Federal Government, FGN: 3.1 percent) in 2020 from 3.8 percent (FGN: 2.4 percent) in 2019.
“There is limited scope for consolidation through spending cuts given fiscal rigidity from payroll and interest outlays, which will represent 150 percent 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 511 percent of revenues (FGN: 1028 percent) in 2020 from 371 percent (FGN: 717 percent) in 2019, rising by five times in eight years and widening the gap with the historical ‘B’ median of 214 percent. Relative to GDP, GG debt will stabilise at 31 percent (FGN: 26 percent) 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 50 percent.
