Fitch Says Nigeria’s Recovery to Remain Sluggish

Fitch Ratings
  • Fitch Says Nigeria’s Recovery to Remain Sluggish

Fitch Ratings, a global ratings agency, said Nigeria’s economic recovery will remain sluggish due to the high unemployment and inflation rate in the country.

The agency predicted that the economy will grow at an average of 2.2 per cent in 2019 and 2020, about 50 percent below its 10-year average of 4.2 per cent and 35.3 percent below its current ‘B’ median of 3.4 per cent.

It projected that rising unemployment and inflation rate would weigh on consumer consumption, while investment in Nigeria will struggle because of tight credit supply, regulatory uncertainty in the oil sector and a weak business climate.

“A large infrastructure deficit, which is illustrated by acute power supply shortages and security challenges, also dampen the medium-term growth outlook,” it added.

Fitch affirmed the nation’s long-term foreign currency issuer default rating at ‘B+’ with a stable outlook.

It said, “Nigeria’s ratings are supported by the large size of its economy, a track record of current account surpluses and a relatively low general government debt-to-GDP. This is balanced against poor governance and development indicators, structurally low fiscal revenues and high dependence on hydrocarbons. The rating is also weighed down by subdued GDP growth and inflation that is higher than in rating peers.”

The agency said the country’s fiscal performance is a function of its oil revenues.

“However, the implicit subsidy of petrol prices (around 0.6 per cent of GDP in 2018), the gradual clearance of joint-venture cash call arrears (outstanding stock of one per cent of GDP at end-2018) and the conversion of government oil proceeds to naira at a below-market exchange rate continue to constrain budget receipts from hydrocarbon extraction,” it said.

It stated that government ability to finance capital projects is limited by disruptions to oil output caused by recurrent acts of vandalism or other force majeure affecting the country’s ageing oil infrastructure.

It said, “Nigeria’s particularly low non-oil fiscal revenues, averaging only 3.7 per cent of GDP over 2016-2018, are a key rating weakness, reducing the fiscal space and resulting in a high fiscal Brent breakeven price of $129 per barrel in 2019 and $149 in 2020, according to Fitch’s estimates.

“A two-thirds rise in the minimum wage entered into force in April and could cause pressures on public finances, particularly for cash-strapped state and local governments, although there is high uncertainty regarding its effective implementation date and fiscal cost. The government is contemplating offsetting measures, including a VAT rate increase, which faces strong opposition across the political spectrum.”

About the Author

Samed Olukoya
CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York based Talk Markets and Investing.com, with over a decade long experience in the global financial market. Contact Samed on Twitter: @sameolukoya; Email: [email protected]; Tel: +2347065163489.

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