Fitch Ratings has downgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’.
Nigeria is now rated six notches above default, and on par with Ecuador and Angola. According to a Friday statement, Fitch has a stable outlook on the country.
The downgrade was due to government debt service costs and worsening external liquidity, despite higher crude prices in 2022, amongst others.
What Fitch is saying: The report said, “Low oil production and the expensive subsidy on petrol have consumed most of the fiscal benefit of high oil prices in 2022 and will 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.”
Fitch noted that 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.
Fitch Comments: “Fitch expects that the implicit subsidy on petrol will cost the government approximately NGN5 trillion (2.4% of GDP) in foregone revenue from the Nigerian National Petroleum Corporation (NNPC) in 2022, which will contribute to a widening of the general government (GG) fiscal deficit to 6.1% of GDP.
The foregone revenue stems from the spread between the regulated pump price of petrol, which has averaged NGN190 per litre, and The import cost, which has averaged above NGN300 per litre.”
Debt binge: The downgrade was also done due to the Cost of Debt Spiking: the report said, Fitch forecasts Nigeria’s GG debt to increase to 34% of GDP by end-2022. This includes the Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria (CBN). Nigeria’s debt stock is low compared with the forecast 2022 ‘B’ median of 57.6% of GDP.
“However, its debt servicing metrics are among the highest for Fitch-rated sovereigns. We forecast government debt/revenue to increase to 580% in 2022 and interest/revenue to reach 47.7%, compared with the current ‘B’ medians of 282% and 10.8%, respectively. Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024.”
