Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been lowered from “B” to “B-” by Fitch Ratings.
Using Ecuador and Angola as benchmark examples, Nigeria is now rated six levels above default. In a release disseminated on Friday, Fitch announced that the nation has a stable forecast.
Despite elevated crude prices in 2022, the downgrade was attributed to the expenses linked to servicing government debt and deteriorating external liquidity, among other elements.
As stated in the Fitch report, “Diminished oil production and the costly subsidy on petrol have absorbed most of the fiscal advantage of high oil prices in 2022 and will persist in exerting pressure on already low government revenue levels.”
Public finances would improve if subsidies were removed in 2023, but constrained oil production and inherently low domestic non-oil revenue mobilization will restrict benefits.
The Petroleum Industry Act of 2021, as per Fitch, includes provisions mandating a shift to a market price for refined fuel products, yet efforts to gradually abolish the subsidy in 2022 have faced delays due to soaring global oil prices.
Lost revenue from the Nigerian National Petroleum Corporation (NNPC) is anticipated to cost the government around NGN5 trillion (2.4% of GDP) in 2022, according to Fitch.
“Fitch projects that the implicit subsidy on petrol will result in approximately NGN5 trillion (2.4% of GDP) in lost revenue from the Nigerian National Petroleum Corporation (NNPC) in 2022, which will lead to an expansion of the general government (GG) fiscal deficit to 6.1% of GDP.
The lost revenue arises from the difference between the regulated pump price of petrol, averaging NGN190 per litre, and the import cost, which has averaged over NGN300 per litre.”
Debt binge
The downgrade was also influenced by the rising cost of debt, as highlighted in the report.
Nigeria’s GG debt is predicted to hit 34% of GDP by the end of 2022, according to Fitch. This figure includes the overdraft with the Central Bank of Nigeria maintained by the Federal Government of Nigeria (FGN) (CBN). Compared to the anticipated 2022 ‘B’ median of 57.6% of GDP, Nigeria’s debt level is relatively low.
“Nonetheless, its debt servicing metrics rank among the highest for Fitch-rated sovereigns. We expect government debt/revenue to rise to 580% in 2022 and interest/revenue to attain 47.7%, in contrast to the current ‘B’ medians of 282% and 10.8%, respectively. Both ratios are likely to remain roughly at the same levels in 2023 before declining slightly in 2024.”
