Fitch Ratings has affirmed Nigeria's long-term foreign-currency issuer default outlook at 'B-' with a stable outlook, listing the country's major strengths as large economy, developed and liquid domestic debt market, and large oil and gas reserves.
The affirmation by the global rating agency came as Governor of the Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, reiterated his determination to change the story of the apex bank and make its policies more impactful on Nigerians. Cardoso gave the assurance while playing host to former CBN governor, Mr. Muhammadu Sanusi II.
Sanusi emphasised the critical role of the central bank and its enormous impact on the lives of citizens.
However, Fitch stated that the rating was constrained by weak governance, structurally very low non-oil revenue, high hydrocarbon dependence, security challenges, high inflation, low net foreign exchange (FX) reserves, and ongoing weakness in the exchange-rate framework.
It acknowledged that the government had taken important steps to reduce fuel subsidies and reform the exchange rate framework much more quickly than it anticipated and had ambitions to substantially raise revenue.
"However, there has recently been some backtracking on reforms, notably a lower degree of price discovery in the FX market than in late June, raising doubt about the strength of this positive momentum," Fitch said.
"In addition, new data on the Central Bank of Nigeria (CBN) suggests its net foreign-exchange position is substantially weaker than we previously understood. These factors are reflected in the stable outlook," the rating agency stated.
While there has been faster reform progress, constraints remain, Fitch noted, highlighting President Bola Tinubu government's removal of fuel subsidies, which cost nearly two per cent of Gross Domestic Product (GDP) in 2022.
"It also unified the multiple exchange rate windows, and the official investors and exporter rate was allowed to depreciate by close to 40 per cent, with renewed volatility around end-October," it stated.
In the report released at the weekend, Fitch explained that it viewed the cabinet, particularly finance minister Wale Edun, and the new CBN governor, Cardoso, as supportive of reforms.
However, it said there were still sizeable socio-political challenges to implementation, including an acceleration in inflation, which could account for recent backtracking of some reforms.
On the challenging exchange rate liberalisation, the agency noted that FX shortages continued to weigh on economic activity and further FX liberalisation, and deter foreign capital.
It stated, "In October, the CBN lifted the ban on providing FX for imports of 43 items, and is currently taking forward plans to clear near $6.7 billion of unmet FX forwards. However, there has been a renewed widening of the gap between the official and parallel exchange rates since July with a premium of over 30 per cent over the official rate.
"Average daily FX turnover at the official exchange rate window has fallen back to near April 2023 levels (well below pre-pandemic), at $95 million in September."
Fitch raised concerns about the weaker net FX reserve position, saying the CBN's gross FX reserves fell to $33.2 billion in September, from $37.1 billion at end-2022.
It observed, "In August 2023, the CBN published its consolidated financial statements for 2022, its first since 2015. These indicate its net foreign exchange position is weaker than we understood, although sizeable gaps remain, preventing a reliable assessment.
"Short-term CBN liabilities at end-2022 included $5.5 billion of foreign-currency (FC) securities lending, and $6.8 billion of FC forward payables.
"There is a particular lack of detail on additional near $32 billion of 'FX forwards, OTC futures, and currency swaps', which is recorded as an off-balance-sheet 'commitment' and not broken down.
"While this likely includes some non-deliverable contracts settled in naira and commitments of a longer tenor, it suggests domestic bank swaps with CBN are probably higher than the $10-12 billion Fitch previously estimated.
"Nevertheless, we expect most swaps will continue to be rolled over, reflecting incentives for banks to invest the naira received in high-yielding sovereign securities and the sector's limited reliance on swaps for FC liquidity, given sizeable FC placements with international banks."
The report predicted a broadly flat current account surplus, averaging 0.5 per cent of GDP in 2023-2024, but expressed concern over the lack of details on the recently announced expectation of $10 billion FX inflow.
It said, "There is a lack of detail on a recent government announcement to raise $10 billion of FX, including whether this includes World Bank budget support loans of $1.5 billion.
"Following the sharp depreciation this year, Fitch assumes exchange-rate adjustments proceed more gradually in subsequent years. Near-term sovereign external debt service is moderate, at $4.3 billion in 2024 (10.2 per cent of current external receipts below the projected 2024 'B' median of 17.7 per cent)."
On revenues from oil, Fitch stated that there had been only a partial recovery in oil production, to 1.57 million bpd (including condensates) in September from a low of 1.25 million bpd in September 2022.
"We anticipate a moderate increase in 2024-2025, averaging 1.81 million bpd, helped by improved onshore surveillance. However, this is still well below the 2.09 million bpd in 2019, reflecting chronic underinvestment in the sector, and likely ongoing production outages," it explained.
Stressing that budget deficits would narrow, Fitch forecasted it to reduce by 0.2 per cent in 2023, to 5.2 per cent of GDP, as strong non-oil revenue growth and fuel subsidy removal is offset by higher capital spending and underperformance in oil profits from Nigerian National Petroleum Corporation Limited (NNPC).
The rating agency stated, "We project a 1.1 per cent of GDP rise in government revenue in 2023-2025, to 8.5 per cent of GDP, helped by increased government efforts to mobilise non-oil tax revenue (including establishing a presidential fiscal and tax reform committee), but this remains one of the lowest ratios of any Fitch-rated sovereign.
"This underpins our forecast for the budget deficit/GDP to narrow to 5.0 per cent and 4.6 per cent in 2024 and 2025."
As for Nigeria's public debt (excluding CBN loans), Fitch ratings stated that it had a fairly long average maturity of 9.7 years.
It said, "The securitisation of N23 trillion of CBN loans at a lower interest rate of 9 per cent has helped contain general government interest costs, but at near 42 per cent of revenues, overall interest expenditure is well above the 'B' median of 10.9 per cent.
"We expect much lower recourse to CBN financing in 2023-2024 than in 2022, although there is a risk demand from the domestic banking sector turns out to be weaker than expected, despite its ample liquidity and strong deposit growth."
It also projected GDP to slow to 2.6 per cent in 2023, from 3.3 per cent in 2022, and to expand to 3.2 per cent in 2024 driven by the services sector and higher oil production.
The report said, "Nigeria's already structurally high inflation rose to an average of 25.5 per cent year-on-year in third quarter 2023, from 20.3 per cent year-of-year in 3Q22, partly reflecting fuel subsidy removal and naira devaluation.
"Fitch projects inflation moderates to 21.1 per cent in 2024 from an average 24.8 per cent in 2023, helped by lower deficit monetisation, but well above the 'B' medians of 6.0 per cent and 4.9 per respectively."
Cardoso Vows to Change CBN's Narrative
Governor of Central Bank of Nigeria (CBN), Mr. Olayemi Cardoso, reaffirmed his determination to change the narrative about the bank and make its policies have a more forceful effect on the populace.
Cardoso stressed that under his watch, the apex bank would focus on its core mandate of price stability, specifically curtailing the rising inflation, which has continued to distort prices.
The CBN governor gave the assurance while playing host to former Governor of the central bank, Mr. Muhammadu Sanusi II.
Cardoso had received the Impact Investing Community, led by Sanusi, who is the 14th Emir of Kano and Khalifa of the Tijaniyyah Sufi Order of Nigeria and neighbouring countries.
Cardoso expressed hope that at the end of his tenure, he would have left behind a central bank whose "policies have positively impacted people's lives".
Addressing the visiting team in his office, Cardoso said his team was determined to change the narrative about the apex bank and make the bank more impactful in the lives of Nigerians by curtailing inflation.
He thanked the community for visiting the CBN, stating that it represents an excellent future for Nigeria, with the potential to transform the country's economy by tapping into the investment opportunities available across the country and the world.
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Cardoso hailed the quality of leadership of the community, especially in its effort to create awareness, and build partnerships.
In a statement, Cardoso said the CBN would collaborate with the Impact Investing Community to initiate frameworks that would encourage investments as well as positively influence the lives of Nigerians, and contribute to economic growth.
Sanusi highlighted the role of the central bank in massively impacting the lives of Nigerians through its activities. He said oftentimes, people did not seem to appreciate the impact of a central bank activity until it failed.
The former CBN governor expressed concerns about the current inflation rate. He urged the new leadership at the CBN to work persistently at driving down the rate, which he noted had severely impacted the wealth of individuals.
He also acknowledged the importance of long-term planning by the CBN in achieving its goals, stressing the need for the fiscal authorities to focus on agriculture and education, especially for the girl-child.
Sanusi pledged his continued support, along with the Impact Investing Community, to the CBN in achieving its goals.
In her remarks, Chair of the community, Mrs. Ibukun Awosika, said they were at the CBN to register their willingness to support what the bank and the federal government were doing in terms of changing Nigeria's investment climate by redirecting resources to areas where they would make the most positive impact.
Awosika said over $200 trillion was available around the globe as investment funds, with $1 trillion of it with impact investing.
She stated that the community, with a presence in over 41 countries, was willing to blend with traditional investment practitioners to make an impact in the country.
Awosika stressed the importance of social investment and sought the support of the CBN to enable the body to achieve its goal.
On his part, CBN Deputy Governor, Corporate Services Directorate, Dr. Bala Bello, underscored the importance of investment, stating that global capital is moving towards social investment. Bello thanked the team for its support, pointing out that collaboration and effective communication are vital in successfully navigating the current challenges in the country.
