Dollar Scarcity: Fitch Downgrades Nigeria’s Outlook to Negative

• Fitch Downgrades Nigeria’s Outlook to Negative

Fitch Ratings has revised the outlook on Nigeria’s long-term foreign and local currency Issuer Default Ratings to negative from stable and affirmed the IDRs at ‘B+.’

The issue ratings on Nigeria’s senior unsecured foreign currency bonds have also been affirmed at ‘B+’, while the ‘Country Ceiling’ was affirmed at ‘B+.

According to a statement by Fitch, the short-term foreign and local currency IDRs have been affirmed at ‘B.’

The revision of the outlook on Nigeria’s long-term IDRs reflected the following key rating drivers.

These include the tight foreign exchange liquidity and low oil production contributed to Nigeria’s first recession since 1994.

The economy contracted through the first three quarters of 2016 and Fitch estimate the Gross Domestic Product growth of -1.5 per cent in 2016 as a whole.

The statement read in part, “We expect a limited economic recovery in 2017, with growth of 1.5 per cent, well below the 2011-15 annual growth average of 4.8 per cent.

It added, “The non-oil economy will continue to be constrained by tight foreign exchange liquidity. Inflationary pressures are high with year-on-year Consumer Price Index inflation increased to 18.5 per cent in December.

“Access to foreign exchange will remain severely restricted until the Central Bank of Nigeria can establish the credibility of the interbank foreign exchange market and bring down the spread between the official rate and the parallel market rates.

“The spot rate for the naira has settled at a range of 305-315 per United States dollar in the official market, while the Bureau de Change rate depreciated to as low as 490 per dollar in November 2016.”

In an effort to work with the CBN to help the parallel market rates converge with the official, the BDC operators had a few weeks ago adopted a reference rate of 400 per dollar.

Fitch, however, noted that the dollar had continued to sell on the black market at rates well above N400.

The global rating agency forecasts that the Federal Government’s cost of debt servicing in 2017 will reach 1.4 per cent of the GDP, up from an average of 1.1 per cent over the previous five years.

According to the agency, the Nigerian banking sector has experienced worsening asset quality as a result of the weakening economy, problems in the oil industry, and exchange rate pressures on borrowers to service their loans.

It added, “The CBN reported that industry non-performing loans grew to 11.7 per cent of gross loans at the end of June 2016, up from 5.3 per cent at the end of December 2015. Tight foreign currency liquidity has also led to some Nigerian banks experiencing difficulty in meeting their trade finance obligations which were either extended or refinanced with international correspondent banks.”

On the current rating on Nigeria, statement said, “Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade.

“However, the following factors could lead to positive rating action: A revival of economic growth supported by the sustained implementation of coherent macroeconomic policies; reduction of the fiscal deficit and the maintenance of a manageable debt burden; increase in foreign exchange reserves to a level that reduces vulnerability to external shocks; successful implementation of economic or structural reforms, for instance raising non-oil revenues, increasing the execution of capital expenditures and passing the Petroleum Industry Bill.”