Fitch Ratings has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B+’ with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Nigeria’s ratings are supported by the large size of its economy, a track record of current account surpluses and a relatively low general government (GG) debt-to-GDP. This is balanced against poor governance and development indicators, structurally low fiscal revenues and high dependence on hydrocarbons. The rating is also weighed down by subdued GDP growth and inflation that is higher than in rating peers.
The 2019 general and gubernational elections passed relatively smoothly, despite technical disruptions and episodes of violence. The incumbent Muhammadu Buhari won a second term and his ruling All Progressives Congress (APC) regained its majority in both chambers of parliament. This could facilitate policy implementation, but weak party discipline in parliament and frequent disagreements between the presidency and legislature point to a continued high risk of delays to parliamentary approval of key legislation. Fitch expects policy continuity with the implementation of only piecemeal reforms, resulting in slow progress on tackling long-standing impediments to growth and weaknesses in macroeconomic management.
Nigeria’s fiscal performance mostly remains a function of fluctuations in oil revenues. However, the implicit subsidy of petrol prices (around 0.6% of GDP in 2018), the gradual clearance of joint-venture (JV) cash call arrears (outstanding stock of 1% of GDP at end-2018) and the conversion of government oil proceeds to naira at a below-market exchange rate continue to constrain budget receipts from hydrocarbon extraction. Fitch estimates that the GG deficit narrowed to 3.6% of GDP (federal government, FGN: 2.3% excluding transfers to state and local governments, SLGs) in 2018 from 4.5% in 2017 (FGN: 3.2%), mostly reflecting the recovery in oil prices.
Fitch forecasts the GG deficit to widen to 3.8% of GDP (FGN: 2.6%) in 2019 and further to 4.6% in 2020 (FGN: 3%) as the rise in oil production with the coming on stream of the Egina oilfield will be offset by the decline in oil prices under our baseline.
Public finances are vulnerable to disruptions to production caused by recurrent acts of vandalism or other force majeure affecting Nigeria’s aging oil infrastructure. A USD10 change per barrel in the Brent oil price against our assumptions would, all else equal, impact the GG balance by around 0.6% of GDP.
Nigeria’s particularly low non-oil fiscal revenues averaging only 3.7% of GDP over 2016-2018 are a key rating weakness, reducing the fiscal space and resulting in a high fiscal Brent breakeven price of USD129 per barrel in 2019 and USD149 in 2020, according to Fitch’s estimates. A two-thirds rise in the minimum wage entered into force in April and could cause pressures on public finances, particularly for cash-strapped SLGs, although there is high uncertainty regarding its effective implementation date and fiscal cost. The government is contemplating offsetting measures, including a VAT rate increase, which faces strong opposition across the political spectrum.