Fitch Affirms Nigeria’s IDR Rating at ‘B+’, Outlook Negative

Fitch Ratings yesterday, 17th of May 2018 affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a negative outlook. The ‘B+’ rating reflects Nigeria’s position as Africa’s largest economy and most populous country, its net external creditor position.

The rating also shows its well-developed domestic debt markets, balanced against a high level of hydrocarbon dependence, low levels of domestic revenue mobilisation and Gross Domestic Product (GDP) per capita, and low rankings on governance and business environment indicators.

Fitch said the negative outlook reflects uncertainty about the sustainability of the economic growth momentum as the impact of earlier shocks eases and progress on addressing high interest service ratios.

Fitch forecasts Nigeria’s GDP growth to accelerate to 2.4 per cent in 2018, as the country continues to climb out of the oil price shock recession that characterised 2016 and first quarter of 2017. Growth turned positive in second quarter of 2017, and the recovery of Oil production, to 2.1 million barrels (including condensates) per day (mbpd) by fourth quarter of 2017, boosted Oil sector output.

Additionally, greater Forex availability provided a lift to the non-oil export sectors, particularly agriculture. Fitch expects that these trends will continue, but notes that tight monetary conditions will continue to weigh on Nigeria’s growth outlook. Fitch forecasts 2019 growth to rise slightly to three per cent, compared with 4.8 per cent for the five years prior to 2016.

At 11.6 per cent, the five-year average inflation is much higher than the ‘B’ category median (4.9 per cent). At its most recent meeting in April 2018, the central bank held its monetary policy rate at 14 per cent, where it has been since July 2016. The need to support the naira and lingering inflation pressures mean that the Central Bank of Nigeria (CBN) will ease monetary policy only gradually.

The Naira has fluctuated close to N360 per Dollar on the Investors & Exporters (I&E) window since its introduction in April 2017. Given most Forex activity is now handled on the I&E window, this implies a devaluation by 45 per cent since the start of forex regime adjustments in June 2016.

Together with higher oil prices and production, this has contributed to the convergence between the parallel market and the I&E rate. However, the Forex market remains segmented and the continued use of exchange controls inhibit greater foreign-currency liquidity and capital inflows. In Fitch’s view, there is unlikely to be any further substantial change by the CBN to the existing Forex rate regime before the 2019 elections.

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