Nigeria’s long-term foreign-currency Issuer Default Rating has taken a hit-downgrade from ‘B+ to ‘B’ in a recent rating by Fitch. The rating portends a bleak outlook for the country.
In a recent report by the rating organisation, Nigeria’s downgrade, which summarily indicates a negative outlook, is a reflection of the “aggravation of the ongoing pressure on Nigeria’s external finances” due to the sharp drop in global oil prices and the coronavirus pandemic.
The report further showed that increasing external pressures have further raised the risk of disruptive macroeconomic adjustment, given the country’s precarious policies in relation to monetary and exchange rates and absence of “fiscal buffers”.
In addition, it is viewed that these shocks will result in raising the debt profile of the country, while increasing the ratio of interest payment-to-revenue, which is already high, and ultimately lead to a renewed economic recession.
“The plunge in international oil prices, which we assume will average of $35/barrel in 2020 after $64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57 per cent of current-account receipts and nearly half of fiscal revenue over the last three years.
“This shock exacerbates the over-valuation of the naira, and remedial policy actions taken by the Central Bank of Nigeria will not suffice to address deteriorating external imbalances, in our view. The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7 per cent since mid-January and devalued the official exchange rate by 15 per cent in March.”
According to the agency, the scope of the enacted adjustment is small relative to magnitude of the shock as well as to the steep real effective exchange rate appreciation of more than 30 per cent since end-2016.
It added, “Real appreciation was driven by persistent high inflation averaging 13.3 per cent in 2017 to 2019 amid rigid nominal exchange rates. Continued pressures on the naira are illustrated by the drawdown in international reserves, which declined by 9.4 per cent year-to-date, representing a cumulative fall of 22.5 per cent since their peak mid-July.
“Reversal of international portfolio inflows in a context of a spike in global risk aversion could magnify the impact of the oil price shock. Nigeria’s vulnerability to short-term capital outflows is high given the sizeable stock of portfolio investments in short-term naira debt securities, equivalent to $27.7bn (6.9 per cent of Gross Domestic Product) at end-2019 and representing around 72 per cent of FC reserves at the time. Of these liabilities, $14.7bn was in non-resident investments in the CBN’s open-market operation bills that were attracted by high interest rates and hedging instruments offered to non-residents at non-economic costs under the CBN’s policy of stabilising the exchange rate.”
The report believes that the drop in oil revenues and slowdown in economic activities would impact heavily on revenues, though with a slight cushion through currency devaluation.
