Just IN: Fitch grades Nigeria’s credit outlook positive

Fitch Ratings

Credit rating agency, Fitch Ratings, has upgraded Nigeria’s credit rating outlook to positive.

It said the positive outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence.

The new rating, second positive outlook in the current administration, comes six months after it raised foreign-currency issuer default outlook to ‘B-‘ with a stable outlook.

It said that reform progress since President Bola Tinubu came to power in May of last year was faster than it anticipated.

“The Positive Outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility,” Fitch said in a statement obtained by our correspondent on Friday.

“Exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria improved, central bank financing of the government scaled back and administrative efficiency measures are being taken to raise the currently low government revenue, as well as oil production.”

It also retained Nigeria’s long-term foreign-currency issuer default rating at B-.

The ratings firm had earlier expressed concerns that weak governance, security challenges, high inflation, structurally low non-oil revenue, high hydrocarbon dependence, and weakness in the exchange-rate framework would constrain economic growth in the West African nation.

Yet, it also expressed optimism that Tinubu would carry out market-friendly reforms, in contrast to predecessors who pursued unorthodox policies that deterred investment.

Tinubu, who marks a year office this month, has initiated policy changes including reducing costly fuel and electricity subsidies, while allowing the naira to trade more freely.

Fitch added that the reforms has reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizeable inflows to the official foreign exchange market.

It further explained that a 70 per cent depreciation and savings from the reduction in subsidies have boosted the government’s naira income and improved its fiscal outlook. Investors have largely welcomed the measures, with Nigerian stocks rallying to a record high and dollar bond yields declining.

“The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizable inflows to the official foreign exchange market.

“Nevertheless, we see significant short-term challenges, notably, inflation is high and the FX market has yet to stabilise, and the durability of the commitment to reform is to be tested.”

The government has said it’s seeking to boost its tax-to-revenue ratio to about 18 per cent of gross domestic product from 10 per cent currently, one of the lowest levels globally. It also hopes to cut the ratio of revenue that goes to debt service to 45 per cent this year from about 98 per cent in 2023.

Efforts to cut the debt-service burden have been complicated by a 600 basis-point increase in local interest rates as the central bank seeks to curb accelerating inflation, which is at a 28-year high.

Public debt in Africa’s most populous nation has risen more than seven-fold since 2015 to N108 trillion as of December, with 39 per cent owed to external creditors including multilateral and commercial lenders.

“Fitch anticipates further increases in the CBN monetary policy rate in 2H24 (following the 600bp hike to 24.75 per cent since February 2024 alongside tightening of reserve requirements) and strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR. We project inflation, which rose to 33.2 per cent yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3 per cent in 2024 and 18.2 per cent in 2025, still well above our projected ‘B’ median of 4.5 per cent.”