Fitch Ratings, a credit rating agency that rates institutions, corporations, and countries for their creditworthiness, has affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Stable Outlook.

Rating Drivers

• Fitch emphasized key factors such as Nigeria’s large economy, developed and liquid domestic debt market, and large oil and gas reserves, as an upside to its B- rating
• The Tinubu-led administration’s reform progress has been faster than expected, following the removal of subsidy and unification of exchange rates across all markets. These policies are deemed necessary for Nigeria’s economic growth hence its positive contribution to the overall rating
• Partial recovery in oil production to 1.57 million barrels per day (MMbpd) in September 2023 from a low of 1.25MMbpd in September 2022 bolsters the outlook for revenue growth. Fitch projects a gradual increase in production levels averaging 1.81MMbpd in 2024-2025 driven by increased onshore surveillance
• The agency projects the country’s budget deficit to narrow 2bps to 5.2% of GDP in 2023
• Additionally, the agency holds a positive view on the presidential cabinet, particularly Finance Minister Wale Edun, and the new CBN governor Olayemi Cardoso, viewing them as supportive of reform

Rating Constraints

• The positive momentum of the exchange rate liberalization is hampered by FX shortages which have seen the gap between the official and parallel exchange rates widen. Average FX turnover at the official exchange rate window has fallen back to April 2023 levels (well below pre-pandemic), at USD95mn in September 2023.
• Nigeria’s weaker Net FX reserve position was also highlighted as a constraint to outlook. Fitch noted that the country’s FX reserves fell to USD33.2bn in September 2023, from USD37.1bn at the end of 2022
• Fitch also highlighted the increase in Nigeria’s general government debt/GDP ratio, which it forecasts to stabilize at 43.9% of GDP in 2024, following a surge from 35.2% at the end of 2022, on the back of Naira depreciation
• Fitch projects Nigeria’s GDP growth to slow to 2.6% in 2023 from 3.3% in 2022, and to expand by 3.2% in 2024 driven by expansion in the services sector and oil production
• Inflation averaged 25.5% YoY in Q3:2023 from 20.3% YoY in Q3:2022 partially reflecting the impacts of fuel subsidy removal and naira devaluation. Fitch projects inflation to moderate to 21.1% in 2024 from an average of 24.8% in 2023 driven by lower deficit monetization

  As we may recall, earlier this year, two major market index providers downgraded Nigeria’s market status. However, Fitch Ratings affirmed its stable outlook for Nigeria, which is a positive sign for the local markets. This classification is expected to have positive implications for Nigeria, as it could help to strengthen both foreign and local investor confidence. However, to maintain its stable outlook and achieve an upgrade, the Nigerian government needs to make significant improvements to key macroeconomic variables, such as inflation, unemployment, and the foreign exchange market.

  In our view, the Nigerian government would need to maintain a sustained increase in oil production (at an average 1.8MMbpd in 2024) and ultimately, its revenue generation, as this would strengthen public finances and make the economy more resilient to shocks.