An outlook revision by Fitch

Fitch last week revised the outlook on its B+ Nigeria sovereign rating for foreign and local currency, long-term obligations from stable to negative. It acted in response to the prevailing fx illiquidity, and its impact on growth, the public finances and the banking sector. Nigeria’s first recession since 1994 should also be attributed, Fitch observes, to the sharp decline in oil output last year. Looking ahead, it accepts the assumption of average production of 2.2 mpbd in this year’s budget proposals.
The agency estimates the current-account deficit at just 1.0% of GDP in 2016, noting the role of substitution within general import compression. We have more resilient import demand, and a deficit of 3.8% of GDP last year.

Fitch also estimates general government debt at 17% of GDP at end-2016. This measure goes beyond sovereign obligations, and so includes the NNPC’s cash-call arrears, which it puts at US$5.1bn. We assume that it does not cover the government arrears of N2.2trn to contractors, exporters and other private-sector parties that the federal finance ministry has recently unearthed.

Fitch says that this debt burden is 77% naira denominated and appears to regret the expected increase in the fx proportion.

We welcome this trend, and think that the FGN should borrow extensively from multilateral agencies at the concessional rates available. We recall the medium-term borrowing strategy of the DMO, which has a target of a 60/40 blend for the domestic and external obligations of the sovereign

We learn from Fitch’s note that the FGN has negotiated exports credits totaling US$10.6bn, subject to the approval of the National Assembly.  We assume that Exim Bank of China is one of the largest providers in question.

Fitch estimates public debt service at 1.4% of GDP this year. Alarmingly, it also amounts to 33.6% of projected aggregate government revenues in 2017

On the banking sector, Fitch notes that NPLs had increased to 11.7% of gross loans in June 2016 as asset quality had deteriorated across the economy. The ratio has since risen to almost 15%.

In September Standard and Poor’s lowered its comparable rating from B+ with a negative outlook to B with a stable outlook. Of the two agencies, Fitch has traditionally been the more patient on Nigerian sovereign risk. It therefore has a rating one notch above S&P’s, and will be looking out for any developments in the exchange-rate regime before making its next move.

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