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Nigeria’s rating at risk as debt, financing gap rise-Fitch

Time to tap investor appetite for debt to the full

A sharp rise in Nigeria’s sovereign debt and a ballooning financing gap could trigger a rating downgrade as policymakers in Africa’s biggest economy struggle to deal with the fallout from a coronavirus-induced oil price crash, a director at Fitch said.

The global ratings agency downgraded Nigeria to “B” in April with a negative outlook from “B+” citing aggravation of pressure on external finances.

Moody’s said in April it would likely downgrade the country if the government was unable to alleviate the damage to its revenue and balance sheet. S&P cut Nigeria’s rating in March on weakening external finances.

Nigeria – also Africa’s top oil exporter – is under increasing pressure to stimulate growth and cut debt after its first quarter current account turned negative, overvaluing its naira currency. The oil price slump has slashed government revenues.

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“We have two elements that could lead us to take a negative rating action/downgrade on Nigeria. Aggravation of external liquidity pressures and a sharp rise in government debt to revenues ratio,” Mahmoud Harb, sovereign ratings director at Fitch, told Reuters.

The debt to revenue ratio for Nigeria is set to worsen to 538% by the end of 2020, from 348% a year earlier, before improving slightly next year, Harb said. The medium debt ratio for “B” rated countries is 350%, he said.

Nigeria will need $23 billion to meet its external financing needs this year, Fitch estimates, noting that the country only has few options, including running down its reserves, after shelving plans to issue Eurobonds.

Abuja’s foreign currency reserves could fall to $23.3 billion this year if foreign exchange access is normalised, Harb said, from around $36 billion.

Nigeria has been restricting access since the pandemic to boost the naira, similar to a step it took when oil prices crashed in 2015, which worsened a 2016 recession.

The central bank is yet to provide currency to investors that need to leave Nigeria, weakening sentiment. Analysts estimate that around $2 billion needs to exit Nigeria.

Nigeria could avoid a ratings downgrade if it strengthens its finances, reforms its forex policy and shows a path to reducing its deficit by boosting non-oil revenues, Fitch’s Harb said.