Fitch raises concerns over $10bn foreign exchange loan, affirms Nigeria’s credit rating stable

Fitch Ratings has affirmed Nigeria’s long-term foreign currency credit default outlook at B – citing President Tinubu’s recent policies as responsible for the stable outlook.

It also raised concerns over the proposed USD 10 billion foreign exchange loan that the government plans to use to offset accumulated forex and inject liquidity into the system.

This is according to her latest comment on the assessment outlook of the Nigerian economy. The global rating agency noted that reforms such as the removal of fuel subsidies and a new exchange rate framework are responsible for the stable outlook.

However, it has shown signs of retreat from reforms, such as “a lower degree of price discovery in the foreign exchange market than at the end of June” and a recent revelation by the nation’s apex bank suggesting that foreign exchange reserves are significantly lower than publicly acknowledged.

Strengths and weaknesses affecting the current rating

Regarding the strengths and weaknesses of the Nigerian economy, the agency noted: “Nigeria’s ‘B-‘ rating is supported by a large economy, a developed and liquid domestic debt market and large oil and gas reserves.

The rating is constrained by weak governance, structurally very low non-oil revenues, high dependence on hydrocarbons, security concerns, high inflation, low net foreign exchange reserves and persistent exchange rate weakness.

Fitch expressed concern over the government’s recent announcement to secure $10 billion in foreign currency, highlighting the absence of specific information, such as whether the amount includes World Bank budget support loans totaling $1.5 billion.

It was stated

  • “We forecast a roughly stagnant current account surplus of 0.5% of GDP on average in 2023-2024. Details are lacking on the government’s recent announcement to raise $10 billion in foreign exchange, including whether it includes loans to support the World Bank’s $1.5 billion budget.
  • After a sharp weakening this year, Fitch expects exchange rate adjustments to take place more slowly in the coming years.

The agency also noted that the country’s public debt, excluding loans from the Central Bank of Nigeria, has a relatively extended average maturity of 9.7 years.

Nigerian Economy Challenges and Growth Spurts

In addition, the agency also said that the shortage of foreign exchange is hampering economic activities in the country and restricting the flow of foreign capital and the CBN’s net foreign exchange position is lower than understood from its financial statement released in August.

The agency further explained that Nigeria’s growth in 2024 will be accelerated by an increase in oil production, a reduction in the budget deficit freeing up resources for capital expenditure, growth in non-oil revenue, etc. However, it highlighted Nigeria’s macroeconomic challenges. include; high inflation, which is estimated to fall to 21.1% in 2024, and high interest rates.

ESG score

On ESG, Fitch scored Nigeria 5, citing the World Bank, which said Nigeria has weak institutional governance capacity.

It was stated

  • “ESG – Governance: Nigeria has an ESG Relevance Score of ‘5’ for both Political Stability and Rights, Rule of Law, Institutional and Regulatory Quality and Control of Corruption.
  • These scores reflect the high weight given to the World Bank Governance Indicators (WBGI) in our own Sovereign Rating Model (SRM).
  • Nigeria scores low on the WBGI at the 17th percentile, reflecting weak institutional capacity, uneven application of the rule of law and high levels of corruption.

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