(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong-April 06:
Fitch Ratings has downgraded Nigeria's Long-Term Foreign-Currency Issuer Default
Rating (IDR) to 'B' from 'B+. The Outlook is Negative.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The downgrade and Negative Outlook reflect the aggravation of ongoing pressures
on Nigeria's external finances following the recent slump in oil prices and the
pandemic shock. Intensifying external pressures raise risks of disruptive
macroeconomic adjustment given Nigeria's precarious monetary and exchange rate
policy setting and lack of fiscal buffers. The shock will also raise government
debt and interest payment-to-revenue ratios from already particularly high
levels and lead to a renewed economic recession.
The plunge in international oil prices, which we assume will average of
USD35/barrel in 2020 after USD64.1/barrel in 2019, highlights Nigeria's high
dependence on the oil sector, with hydrocarbon revenues representing 57% of
current-account receipts and nearly half of fiscal revenue over the last three
years. This shock exacerbates the overvaluation of the naira and remedial policy
actions taken by the Central Bank of Nigeria (CBN) will not suffice to address
deteriorating external imbalances, in our view. The CBN allowed the exchange
rate on the Investor and Exporter Window, on which the bulk of foreign-currency
(FC) transactions is held, to depreciate by 6.7% since mid-January and devalued
the official exchange rate by 15% in March.
The scope of the enacted adjustment is small relative to magnitude of the shock
as well as to the steep real effective exchange rate appreciation of more than
30% since end-2016. Real appreciation was driven by persistent high inflation
averaging 13.3% in 2017-2019 amid rigid nominal exchange rates. Continued
pressures on the naira are illustrated by the drawdown in international
reserves, which declined by 9.4% year-to-date, representing a cumulative fall of
22.5% since their peak mid-July.
Reversal of international portfolio inflows in a context of a spike in global
risk aversion could magnify the impact of the oil price shock. Nigeria's
vulnerability to short-term capital outflows is high given the sizeable stock of
portfolio investments in short-term naira debt securities, equivalent to
USD27.7billion (6.9% of GDP) at end-2019 and representing around 72% of FC
reserves at the time. Of these liabilities, USD14.7 billion was in non-resident
investments in the CBN's open-market operation bills that were attracted by high
interest rates and hedging instruments offered to non-residents at non-economic
costs under the CBN's policy of stabilising the exchange rate.
Continued reluctance to adjust the exchange rate, portfolio outflows and a wide
current-account deficit (CAD) will lead FC reserves to fall to 2.5 months of
current account payments at end-2020 under our forecasts, well below the
historical 'B' median of 3.8 months, and their lowest level since 1994. We
estimate that the CAD will widen to a record level of 4.9% of GDP in 2020,
exceeding the historical 'B' median of 4.3%, under our assumption of only modest
depreciation of the naira. Nigeria's long-standing current account surplus
shifted to a deficit of 4.2% of GDP in 2019 on an upsurge in imports, chiefly of
equipment goods. We project the CAD to narrow to 1.8% in 2021 reflecting partial
recovery of oil prices to USD45/b, import compression and tighter restrictions
on FC access.
Nigeria's external finances are highly vulnerable to a further fall in
international oil prices below our current forecasts. Despite the expiry of
production caps under the OPEC+ agreement, there is little scope to ramp up
Nigeria's oil production beyond our current assumption of 2.1 mbpd given
capacity constraints and the build-up of a global supply glut on oil markets.
Under a stable oil production assumption, a USD10 drop in average Brent
benchmark prices below our current projection would cause the CAD to widen by an
additional 1.6% of GDP. Furthermore, the domestic oil sector's operational
breakeven is around USD25-30/barrel, based on official estimates, meaning
production cuts are likely should oil prices continue to hover well below
USD30/barrel.
The collapse in oil revenues and the slowdown in economic activity will take a
toll on the government's already weak fiscal revenues. This will be partly
cushioned by the devaluation of the official exchange rate, which will boost
fiscal oil revenues in naira terms. In addition, the fall in international fuel
prices will allow the government to eliminate the implicit fuel subsidy.
Nigeria's fiscal breakeven oil price is high, at USD133/barrel under our
estimates, given particularly low non-oil fiscal intakes.
We project the general government (GG) deficit will widen to 5.8% of GDP
(federal government, FGN: 3.1%) in 2020 from 3.8% (FGN: 2.4%) in 2019. There is
limited scope for consolidation through spending cuts given fiscal rigidity from
payroll and interest outlays, which will represent 150% of the FGN's revenues
and two-thirds of its expenditures in 2020. Cuts to other operational outlays
and capital expenditures will be largely offset by higher spending on health
services and support to sectors affected by the pandemic shock.
Low fiscal revenues present a major challenge to debt sustainability. GG debt
will edge up to 511% of revenues (FGN: 1028% ) in 2020 from 371% (FGN: 717%) in
2019, rising by five times in eight years and widening the gap with the
historical 'B' median of 214%. Relative to GDP, GG debt will stabilise at 31%
(FGN:26%) in 2020-2021 under our projections, its highest level since the
restructuring of the Paris Club debt in 2005, but still below the historical 'B'
median of 50%.
We expect the government will cover most of its funding needs on domestic
markets in 2020, but could still tap emergency funding facilities of
multilateral creditors such as the IMF and the African Development Bank. The
government had resorted to monetary financing in 2019 with net CBN claims on the
FGN soaring to 4% of GDP at end-2019, exceeding annual FGN revenues, from nearly
0% at end-2018.
We expect the pandemic shock to push the Nigerian economy into recession with
GDP contracting by 1% in 2020. Non-oil GDP will fall, weighed down by spillovers
from the oil sector, tighter FC supply and disruptions to economic activity from
measures taken to contain the spread of the coronavirus as regions accounting
for nearly half of the national economy were put under a two-week lockdown in
March. We expect GDP to bounce back by 4.4% in 2021 assuming a gradual
normalisation of economic activity and stable oil production but risks around
our baseline are tilted to the downside given uncertainty regarding the spread
of the pandemic.
Nigeria's 'B' rating also reflects the following rating drivers:
Materialisation of large contingent liabilities on the government's balance
sheet could cause a steeper rise in GG debt than our current forecasts. The
collapse in oil prices will pressure already overstretched state and local
governments' resources, possibly requiring financial assistance from the FGN.
Delays to electricity tariff hikes and to restructuring plans following the
pandemic outbreak will raise needs for further support to the ailing electricity
sector.
Asset quality in the banking sector is weak, with non-performing loans of 11.7%
of total bank loans at end-2018 and an elevated proportion of restructured
loans. It is likely to deteriorate given high bank exposure to the oil sector
and broad weakening of the operating environment, which could prompt capital
injections by the sovereign. This is in addition to contingent liabilities from
the debt of the Asset Management Corporation of Nigeria of 3.3% of GDP at
end-2018.
Nigeria has an ESG Relevance Score of 5 for both Political Stability and Rights
and Rule of Law, Institutional and Regulatory Quality and Control of Corruption,
as is the case for all sovereigns. Theses scores reflect the high weight that
the World Bank Governance Indicators have in our proprietary Sovereign Rating
Model. Lingering insecurity causes disruptions to the economy, while deep
regional divisions hinder policy-making.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Nigeria a score equivalent to a rating of 'B' on
the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to
arrive at the final LT FC IDR.
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Negative Rating
Action/Downgrade:
-Intensification of external liquidity pressures under the current policy
framework illustrated by a rapid drawdown in reserves or signs of
foreign-currency shortages in the economy;
-A sharp rise in general government debt/revenues from larger funding needs than
our current projections or materialisation on the sovereign's balance sheet of
contingent liabilities, for example from the broad public sector or the banking
sector.
Factors That Could, Individually or Collectively, Lead to Positive Rating
Action/Upgrade:
- Significantly stronger external finances than our current forecasts with
smaller than projected current account deficits or a recovery in international
reserves and broad exchange-rate regime reform;
- Credible path to smaller fiscal deficits from stronger mobilisation of
domestic non-oil revenues and improved public finance management.
Best/Worst Case Rating Scenario
Ratings of Public Finance issuers have a best-case rating upgrade scenario
(defined as the 99th percentile of rating transitions, measured in a positive
direction) of three notches over a three-year rating horizon; and a worst-case
rating downgrade scenario (defined as the 99th percentile of rating transitions,
measured in a negative direction) of three notches over three years. The
complete span of best- and worst-case scenario credit ratings for all rating
categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit
ratings are based on historical performance. For more information about the
methodology used to determine sector-specific best- and worst-case scenario
credit ratings https://www.fitchratings.com/site/re/10111579.
Key Assumptions
We expect global economic trends to develop as outlined in Fitch's most recent
Global Economic Outlook. We project Brent oil prices to average USD35/barrel in
2020 and USD45/barrel in 2021. We expect Nigeria's oil production volume to
average 2.1 mbpd in 2020-2021, up from 1.96 mbpd in 2019, supported by the
coming online of the Egina oilfield.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the
Applicable Criteria.
Nigeria does not publish consolidated fiscal data on a general government basis,
which complicates the assessment of fiscal performance. However, Fitch is able
to produce its own estimates for general government fiscal metrics that are
broadly consistent with and comparable to the data used for other sovereigns,
providing sufficient information to maintain the rating. The rating level
further mitigates residual uncertainty on the accuracy of the Fitch estimates.
These estimates are based on disaggregated data on federal, state and local
government revenue, spending and debt published by the Nigerian National
Petroleum Corporation (NNPC), the CBN, the Debt Management Office (DMO), the
Budget Office of the Federation (BOF) and the National Bureau of Statistics
(NBS).
ESG Considerations
Nigeria has an ESG Relevance Score of 5 for Political Stability and Rights as
World Bank Governance Indicators have the highest weight in Fitch's Sovereign
Rating Model. This is highly relevant to the rating, and a key rating driver
with a high weight.
Nigeria has an ESG Relevance Score of 5 for Rule of Law and Institutional and
Regulatory Quality, as World Bank Governance Indicators have the highest weight
in Fitch's Sovereign Rating Model. This is highly relevant to the rating, and a
key rating driver with a high weight.
Nigeria has an ESG Relevance Score of 4 for Human rights and Political Freedoms,
as the Voice and Accountability pillar of the World Bank Governance Indicators
is relevant to the rating and a rating driver.
Nigeria has an ESG Relevance Score of 4 for Creditors Rights as willingness to
service and repay debt is a rating driver for Nigeria, as for all sovereigns.
Nigeria; Long Term Issuer Default Rating; Downgrade; B; RO:Neg
----; Short Term Issuer Default Rating; Affirmed; B
----; Local Currency Long Term Issuer Default Rating; Downgrade; B; RO:Neg
----; Local Currency Short Term Issuer Default Rating; Affirmed; B
----; Country Ceiling; Downgrade; B
----senior unsecured; Long Term Rating; Downgrade; B
Contacts:
Primary Rating Analyst
Mahmoud Harb,
Director
+852 2263 9917
Fitch (Hong Kong) Limited
19/F Man Yee Building 60-68 Des Voeux Road Central
Hong Kong
Secondary Rating Analyst
Jermaine Leonard,
Director
+852 2263 9830
Committee Chairperson
Jan Friederich,
Senior Director
+852 2263 9910
Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email:
peter.fitzpatrick@thefitchgroup.com; Wai Lun Wan, Hong Kong, Tel: +852 2263
9935, Email: wailun.wan@thefitchgroup.com.
Additional information is available on www.fitchratings.com
Applicable Criteria
Country Ceilings Criteria (pub. 05 Jul 2019)
https://www.fitchratings.com/site/re/10081234
Sovereign Rating Criteria (pub. 27 Mar 2020) (including rating assumption
sensitivity)
https://www.fitchratings.com/site/re/10113182
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to
criteria providing description of model(s).
Country Ceiling Model, v1.7.1
1-https://www.fitchratings.com/site/re/954138
Debt Dynamics Model, v1.2.0
1-https://www.fitchratings.com/site/re/969345
Macro-Prudential Indicator Model, v1.4.0
1-https://www.fitchratings.com/site/re/969345
Sovereign Rating Model, v3.11.0
1-https://www.fitchratings.com/site/re/969345
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/site/dodd-frank-disclosure/10117105
Solicitation Status
https://www.fitchratings.com/site/pr/10117105#solicitation
Endorsement Status
https://www.fitchratings.com/site/pr/10117105#endorsement_status
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE
FOLLOWING
https://www.fitchratings.com/site/dam/jcr:6b03c4cd-611d-47ec-b8f1-183c01b51b08/R
ating%20Definitions%20-%203%20May%202019%20v3%206-11-19.pdf DETAILS FITCH'S
RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING
DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES
ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT,
CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND
OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF
CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE
AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE
PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD
PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED
IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS
ISSUER ON THE FITCH WEBSITE.
Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824,
(212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or
in part is prohibited except by permission. All rights reserved. In issuing and
maintaining its ratings and in making other reports (including forecast
information), Fitch relies on factual information it receives from issuers and
underwriters and from other sources Fitch believes to be credible. Fitch
conducts a reasonable investigation of the factual information relied upon by it
in accordance with its ratings methodology, and obtains reasonable verification
of that information from independent sources, to the extent such sources are
available for a given security or in a given jurisdiction. The manner of Fitch's
factual investigation and the scope of the third-party verification it obtains
will vary depending on the nature of the rated security and its issuer, the
requirements and practices in the jurisdiction in which the rated security is
offered and sold and/or the issuer is located, the availability and nature of
relevant public information, access to the management of the issuer and its
advisers, the availability of pre-existing third-party verifications such as
audit reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third parties,
the availability of independent and competent third- party verification sources
with respect to the particular security or in the particular jurisdiction of the
issuer, and a variety of other factors. Users of Fitch's ratings and reports
should understand that neither an enhanced factual investigation nor any
third-party verification can ensure that all of the information Fitch relies on
in connection with a rating or a report will be accurate and complete.
Ultimately, the issuer and its advisers are responsible for the accuracy of the
information they provide to Fitch and to the market in offering documents and
other reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to financial
statements and attorneys with respect to legal and tax matters. Further, ratings
and forecasts of financial and other information are inherently forward-looking
and embody assumptions and predictions about future events that by their nature
cannot be verified as facts. As a result, despite any verification of current
facts, ratings and forecasts can be affected by future events or conditions that
were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or
warranty of any kind, and Fitch does not represent or warrant that the report or
any of its contents will meet any of the requirements of a recipient of the
report. A Fitch rating is an opinion as to the creditworthiness of a security.
This opinion and reports made by Fitch are based on established criteria and
methodologies that Fitch is continuously evaluating and updating. Therefore,
ratings and reports are the collective work product of Fitch and no individual,
or group of individuals, is solely responsible for a rating or a report. The
rating does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the offer or
sale of any security. All Fitch reports have shared authorship. Individuals
identified in a Fitch report were involved in, but are not solely responsible
for, the opinions stated therein. The individuals are named for contact purposes
only. A report providing a Fitch rating is neither a prospectus nor a substitute
for the information assembled, verified and presented to investors by the issuer
and its agents in connection with the sale of the securities. Ratings may be
changed or withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not comment on the
adequacy of market price, the suitability of any security for a particular
investor, or the tax-exempt nature or taxability of payments made in respect to
any security. Fitch receives fees from issuers, insurers, guarantors, other
obligors, and underwriters for rating securities. Such fees generally vary from
US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In
certain cases, Fitch will rate all or a number of issues issued by a particular
issuer, or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000
(or the applicable currency equivalent). The assignment, publication, or
dissemination of a rating by Fitch shall not constitute a consent by Fitch to
use its name as an expert in connection with any registration statement filed
under the United States securities laws, the Financial Services and Markets Act
of 2000 of the United Kingdom, or the securities laws of any particular
jurisdiction. Due to the relative efficiency of electronic publishing and
distribution, Fitch research may be available to electronic subscribers up to
three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd
holds an Australian financial services license (AFS license no. 337123) which
authorizes it to provide credit ratings to wholesale clients only. Credit
ratings information published by Fitch is not intended to be used by persons who
are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange
Commission as a Nationally Recognized Statistical Rating Organization (the
"NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on
Item 3 of Form NRSRO and as such are authorized to issue credit ratings on
behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other
credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and
therefore credit ratings issued by those subsidiaries are not issued on behalf
of the NRSRO. However, non-NRSRO personnel may participate in determining credit
ratings issued by or on behalf of the NRSRO.