Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded from “B” to “B-” by Fitch Ratings.
With Ecuador and Angola as comparison examples, Nigeria is now rated six notches above default. In a statement released on Friday, Fitch stated that the nation has a stable outlook.
Despite higher crude prices in 2022, the downgrade was caused by costs associated with servicing government debt and worsening external liquidity, among other factors.
According to the report from Fitch, “Low oil production and the expensive subsidy on petrol have consumed most of the fiscal benefit of high oil prices in 2022 and will continue to stress already low government revenue levels.”
The public finances would benefit if subsidies were cut in 2023, but limited oil production and structurally low domestic non-oil revenue mobilization will limit gains.
The Petroleum Industry Act of 2021, according to Fitch, contains language requiring a transition to a market price for refined fuel products, but plans to gradually eliminate the subsidy in 2022 have been delayed because of higher global oil prices.
Foregone revenue from the Nigerian National Petroleum Corporation (NNPC) is expected to cost the government approximately NGN5 trillion (2.4% of GDP) in 2022, according to Fitch.
“Fitch expects that the implicit subsidy on petrol will cost the government approximately NGN5 trillion (2.4% of GDP) in foregone revenue from the Nigerian National Petroleum Corporation (NNPC) in 2022, which will contribute to a widening of the general government (GG) fiscal deficit to 6.1% of GDP.
The foregone revenue stems from the spread between the regulated pump price of petrol, which has averaged NGN190 per litre, and The import cost, which has averaged above NGN300 per litre.”
Debt binge
The downgrade was also made as a result of the cost of debt escalation, according to the report.
Nigeria’s GG debt is expected to reach 34% of GDP by the end of 2022, according to Fitch. This includes the overdraft with the Central Bank of Nigeria held by the Federal Government of Nigeria (FGN) (CBN). In comparison to the forecasted 2022 ‘B’ median of 57.6% of GDP, Nigeria’s debt stock is low.
“However, its debt servicing metrics are among the highest for Fitch-rated sovereigns. We forecast government debt/revenue to increase to 580% in 2022 and interest/revenue to reach 47.7%, compared with the current ‘B’ medians of 282% and 10.8%, respectively. Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024.”
