Fitch Revises Nigeria's Outlook to Stable, Affirms at 'B'

(The following statement was released by the rating agency)
Fitch Ratings-Hong Kong-30 September 2020:
Fitch Ratings has revised the Outlook on Nigeria's Long-Term Foreign-Currency
Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at
'B'.

A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
The revision of the Outlook reflects a decrease in the level of uncertainty
surrounding the impact of the global pandemic shock on the Nigerian economy.
Oil prices have stabilised, global funding conditions have eased and domestic
restrictions on movement have started to be relaxed. Nigeria has navigated
external liquidity pressures from the shock through partial exchange rate
adjustment combined with de facto capital flow management measures and
foreign-currency (FC) restrictions, while disbursement of external official
loans has supported the level of international reserves. While external
vulnerability persists from currency overvaluation and a possibly large FC
demand backlog, this is adequately captured by the 'B' rating, in our view.

The Central Bank of Nigeria (CBN) continues to prioritise exchange rate
stability over other policy goals, in Fitch's view. A 6% depreciation in March
of the Investor and Exporter (I&E) exchange rate at which most FC
transactions are carried out fell short of fully correcting the naira's
appreciation by about 35% in real terms between mid-2016 and February 2020.
Steep real appreciation has been driven by persistent double-digit inflation,
which has offset gains from the devaluations in 2016 and 2017. Meanwhile, the
CBN has achieved progress towards its stated goal of unifying the exchange
rate, following a cumulative 19% two-step devaluation of the 'official'
exchange rate, which is mostly used for the government's and the oil sector's
FC transactions.

The broad stability of the I&E rate since end-March has been mostly
achieved through a severe contraction in FC supply, illustrated by a drop in
the average value of daily transactions on the I&E window by 87% in
April-August relative to the 1Q20 average. Tightening FC supply for trade and
financial transactions could harm growth and exacerbate inflationary
pressures, driving further misalignment of the naira's real exchange rate.
Inflation accelerated to a 29-month high of 13.3% in August and we expect it
to average 13% over the full year, well above the forecast 'B' median of 5%.

Unfulfilled FC demand could constitute a drain on reserves once supply is
relaxed. The CBN has started to increase FC provision in September through a
combination of spot and forward sales but the magnitude of actual FC outflows
in case of full supply normalisation is unknown. We understand that the stock
of outstanding non-resident holdings of CBN open-market operation (OMO) bills
was around USD10 billion in August. Non-resident investments in short-term
money market instruments amounted to USD27.7 billion at end-2019, equivalent
to 72% of international reserves at the time, more than half of which were in
OMO bills.

De facto FC restrictions could also damage investor confidence and possibly
lead to Nigeria's exclusion from benchmark equity indices, durably impeding a
return of foreign inflows. This would place the onus of rebuilding reserves on
sovereign external borrowing amid continued current account (CA) deficits. The
government has secured multilateral loans of USD4 billion in 2020, of which
USD3.4 billion is from the IMF, helping a recovery in international reserves
from a 30-month low of USD 33.4 billion in April to USD35.8 billion on 24
September. We understand that around 15% of international reserves are pledged
in swaps.

International reserves will remain under pressure from CA deficits in 2020 and
2021, marking an interruption to a long streak of external surpluses. We
project Nigeria to record a CA deficit of 3% of GDP in 2020 (forecast 'B'
median: 5%), versus a 4.2% deficit in 2019, as the contraction in imports and
lower outflows of investment income offset a decline in both hydrocarbon
exports and remittances (6.5% of GDP in 2017-2019). The CA will revert back to
balance in 2022 under our baseline driven by import compression from weak
domestic demand and tighter FC restrictions on a wide range of imports.
Hydrocarbon exports will also be lifted by the gradual recovery in prices and
a rise in oil extraction volume as production caps under the ongoing OPEC+
agreement expire.

The 'B' rating also reflects weak fiscal revenues, comparatively low
governance and development indicators, high dependence on hydrocarbons and a
track record of subdued growth and high inflation. These rating weaknesses are
balanced against the large size of Nigeria's economy, low general government
(GG) debt relative to GDP, small FC indebtedness of the sovereign and a
comparatively developed financial system with a deep domestic debt market.

Low fiscal revenues are a major credit weakness. GG receipts averaged 6.8% of
GDP in 2015-2019, well below the current 'B' median of 22%. Revenues will
benefit from the removal of the fuel subsidy, which has cumulatively cost the
budget around 7% of 2019 GDP in 2016-2019. The government has affirmed its
firm commitment to this reform as well as its intention to continue phasing
out costly electricity subsidies. However, the energy price reform faces
strong opposition from labour unions and the authorities have reinstated
subsidies in the past in response to social protests.

We do not expect any further progress on fiscal revenue-enhancing reforms over
the forecast horizon. With broadly stable budget receipts, GG debt will rise
to 450% of fiscal revenues in 2022 (federal government, FGN: 1162%), far above
the forecast 'B' median of 321% and up from 343% in 2019 (FGN: 898%). GG debt
is low relative to GDP, at 26.7% in 2019 (FGN:22%), rising towards 31% in 2022
(FGN: 27%), less than half the forecast 'B' median of 69% of GDP. Exchange
rate risks to the debt trajectory are low given a small share of FC debt at
26% of total GG debt at end-2019, compared to a 'B' median of 63% in the same
year.

Given the lack of fiscal space, the budget response to the pandemic shock has
been muted relative to comparable emerging countries. GG spending will only
increase by 0.5% of GDP in 2020 under our forecasts as the bulk of the
pandemic-related expenditures will be offset by cuts to capital and other
current outlays. We project the hit to revenues from the pandemic shock to
prompt a deterioration in the GG balance from 3.6% of GDP in 2019 to 5.4% in
2020, a still much smaller deficit than the forecast 'B' median of 7.3% of
GDP. Spending restraint and economic recovery will drive a modest narrowing in
the GG deficit to 4.5% of GDP in 2022 (forecast 'B' median: 4.8%). Public
finances are vulnerable to fluctuations in oil prices and Nigeria's fiscal
breakeven oil price is high, at USD134/barrel in 2020 under our estimates.

We expect the government to cover most of its funding needs in 2020-2022
domestically, supported by ample liquidity in the non-banking financial system
as highlighted by the negative real rates on local currency debt. However, the
authorities are also likely to seek to increase the share of external
borrowing, mostly on concessional terms, although slow progress on reforms
might hinder further official creditor support, in Fitch's view. Withdrawals
from the already thin fiscal buffers at the outset of the pandemic has left
them merely depleted. The government continues to resort to monetary financing
since early 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.

Transparency on contingent liabilities is low. The collapse in oil prices will
pressure already overstretched state and local governments' resources,
possibly requiring financial assistance from the FGN. Recurrent delays to
electricity tariff hikes towards cost-recovery levels will raise needs for
further support to the ailing electricity sector. The exposure of banks to the
oil sector is sizeable and the likely deterioration in asset quality following
the oil price crash could increase the need for government support to the
sector. Contingent liabilities for the sovereign stem from the debt of the
Asset Management Corporation of Nigeria of 3.3% of GDP at end-2018.

The Nigerian economy will contract by 3% in 2020 (forecast 'B' median: -2.6%),
its sharpest decline in 37 years. Oil-GDP will be affected by productions cuts
under the OPEC+ agreement despite some slippages in earlier months while
non-oil activity will be weighed down by spillovers from the hydrocarbon
sector, restrictions aiming to halt the spread of the pandemic and FC
scarcity. We project GDP to grow by 1.3% in 2021 and 3% in 2022 (forecast 'B'
median: 4% and 4.6% respectively), assuming an easing of disruptions from the
health crisis, a slow recovery in oil prices and adherence to OPEC+ production
caps. The medium-term growth outlook is subdued but progress on the
elaboration of the long-stalled Petroleum Governance Bill could lead to
revival in investment in the hydrocarbon sector.

ESG-Governance: 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.
RATING SENSITIVITIES
The main factors that could, individually or collectively, lead to positive
rating action/upgrade are:

- External Finances: Stronger resilience of external finances from a durable
recovery in international reserves or resumption of current account surpluses,
and exchange rate regime reform addressing Nigeria's ongoing external
vulnerability;

- Public Finances: Credible path to stronger mobilisation of domestic non-oil
revenues;

- Macro: Stronger economic growth supporting a recovery in GDP per capita and
a moderation in inflation towards the central bank's target.

The main factors that could, individually or collectively, lead to negative
rating action/downgrade:

-External Finances: Significant intensification of external liquidity
pressures, for example illustrated by a rapid drawdown in reserves or renewed
downturn in oil prices;

-Public Finances: 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 from the broad public
sector or the banking sector.
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.

Fitch's SRM is the agency's proprietary multiple regression rating model that
employs 18 variables based on three-year centred averages, including one year
of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a
forward-looking qualitative framework designed to allow for adjustment to the
SRM output to assign the final rating, reflecting factors within our criteria
that are not fully quantifiable and/or not fully reflected in the SRM.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and
Infrastructure 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, visit [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 published 7 September 2020. We project Brent oil
prices to average USD41/barrel in 2020, USD45/barrel in 2021 and USD50/barrel
in 2021. We expect Nigeria's oil production volume to average 1.93mbpd in
2020, 1.87mbpd in 2021 and 2mbpd in 2022 assuming compliance with the
production ceilings stipulated under the most recent OPEC+ agreement.
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.

Except for the matters discussed above, the highest level of ESG credit
relevance, if present, is a score of 3. This means ESG issues are
credit-neutral or have only a minimal credit impact on the entity(ies), either
due to their nature or to the way in which they are being managed by the
entity(ies). For more information on Fitch's ESG Relevance Scores, visit
www.fitchratings.com/esg.
Nigeria; Long Term Issuer Default Rating; Affirmed; B; Rating Outlook Stable
----; Short Term Issuer Default Rating; Affirmed; B
----; Local Currency Long Term Issuer Default Rating; Affirmed; B; Rating
Outlook Stable
----; Local Currency Short Term Issuer Default Rating; Affirmed; B
----; Country Ceiling; Affirmed; B
----senior unsecured; Long Term Rating; Affirmed; 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. 01 Jul 2020)
(https://www.fitchratings.com/site/re/10127456)
Sovereign Rating Criteria (pub. 27 Apr 2020) (including rating assumption
sensitivity) (https://www.fitchratings.com/site/re/10119272)

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/976717))
Debt Dynamics Model, v1.2.0 (1 (https://www.fitchratings.com/site/re/972934))
Macro-Prudential Indicator Model, v1.5.0 (1
(https://www.fitchratings.com/site/re/972934))
Sovereign Rating Model, v3.12.1 (1
(https://www.fitchratings.com/site/re/972934))

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
(https://www.fitchratings.com/site/dodd-frank-disclosure/10137905)
Solicitation Status
(https://www.fitchratings.com/site/pr/10137905#solicitation)
Endorsement Status
(https://www.fitchratings.com/site/pr/10137905#endorsement_status)
Endorsement Policy
(https://www.fitchratings.com/site/pr/10137905#endorsement-policy)

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