Fitch Af­firms Nige­ria’s ‘B+’ Rat­ing, Neg­a­tive Out­look

THISDAY - - FRONT PAGE - Obinna Chima

Fitch Rat­ings has af­firmed Nige­ria’s long-term for­eign­cur­rency Is­suer De­fault Rat­ing (IDR) at ‘B+’ with a neg­a­tive out­look.

This is just as the coun­try’s ex­ter­nal re­serves recorded a sec­ond con­sec­u­tive day drop to $47.787 bil­lion as of May 15 com­pared with N47.846 bil­lion last Fri­day.

Ex­ter­nal re­serves fig­ures seen on the Cen­tral Bank of Nige­ria’s web­site showed that this was the sec­ond time the ac­cre­tion to the forex re­serves cur­rently at a five-year high was halted.

Fitch, a global rat­ing agency, ex­plained in a state­ment yes­ter­day that the ‘B+’ rat­ing it as­signed to the coun­try re­flected Nige­ria’s po­si­tion as Africa’s largest econ­omy and most pop­u­lous coun­try, its net ex­ter­nal cred­i­tor po­si­tion and its well-de­vel­oped do­mes­tic debt mar­ket, low lev­els of do­mes­tic rev­enue mo­bil­i­sa­tion and GDP per capita, and low rank­ing on gover­nance and busi­ness en­vi­ron­ment in­di­ca­tors.

It stated that the neg­a­tive out­look fur­ther re­flected un­cer­tainty about the sus­tain­abil­ity of Nige­ria’s eco­nomic growth mo­men­tum as the im­pact of ear­lier shocks ease and progress in ad­dress­ing high-in­ter­est ser­vice ra­tios.

How­ever, Fitch pre­dicted that Nige­ria’s GDP growth would ac­cel­er­ate to 2.4 per cent in 2018, as the coun­try con­tin­ues to climb out of the oil price shock re­ces­sion that char­ac­terised 2016 and the first quar­ter of 2017.

Nige­ria’s growth rate turned pos­i­tive in the sec­ond quar­ter of 2017, and the re­cov­ery of oil pro­duc­tion to 2.1 mil­lion bar­rels per day (in­clud­ing con­den­sates) by the fourth quar­ter of 2017, boosted oil rev­enue.

Greater FX avail­abil­ity also pro­vided a lift to non-oil ex­port sec­tors, par­tic­u­larly agri­cul­ture.

“Fitch ex­pects that these trends will con­tinue, but notes that tight mone­tary con­di­tions will con­tinue to weigh on Nige­ria’s growth out­look. Fitch fore­casts 2019

growth to rise slightly to three per cent, com­pared with 4.8 per cent for the five years prior to 2016.

“At 11.6 per cent, the five-year av­er­age in­fla­tion is much higher than the ‘B’ cat­e­gory me­dian (4.9%),” it added.

At its most re­cent meet­ing in April 2018, the cen­tral bank held its mone­tary pol­icy rate at 14 per cent. But the rat­ing agency pointed out that the need to sup­port the naira and lin­ger­ing in­fla­tion pres­sures means that the CBN would ease mone­tary pol­icy “only grad­u­ally”.

The naira has fluc­tu­ated close to N360 per dol­lar on the In­vestors & Ex­porters (I&E) win­dow since its in­tro­duc­tion in April 2017. Ac­cord­ing to the state­ment, given that most FX ac­tiv­i­ties are now han­dled on the I&E win­dow, it im­plied a de­val­u­a­tion by 45 per cent since the start of FX regime ad­just­ments in June 2016.

“To­gether with higher oil prices and pro­duc­tion, this has con­trib­uted to the con­ver­gence be­tween the par­al­lel mar­ket and the I&E rates.

“How­ever, the FX mar­ket re­mains seg­mented and the con­tin­ued use of ex­change con­trols in­hibit greater foreign-cur­rency liq­uid­ity and cap­i­tal in­flows.

“In Fitch’s view, there is un­likely to be any fur­ther sub­stan­tial change by the CBN to the ex­ist­ing FX rate regime be­fore the 2019 elec­tions.

“In­creas­ing oil re­ceipts and im­port com­pres­sion have buoyed Nige­ria’s trade sur­plus and brought the cur­rent ac­count sur­plus to an es­ti­mated 2.2 per cent of GDP in 2017.

“Fitch ex­pects that im­ports will be­gin to re­turn to his­tor­i­cal lev­els, es­pe­cially as gov­ern­ment cap­i­tal ex­pen­di­ture in­creases and the cur­rent ac­count sur­plus will nar­row in 2018,” it added.

Nige­ria’s ex­ter­nal re­serves po­si­tion has in­creased to a four-year high due to stronger oil re­ceipts and con­sid­er­able hard-cur­rency bond place­ments.

As of end-April, gross in­ter­na­tional re­serves were $47.5 bil­lion, or eight months of cur­rent ex­ter­nal pay­ments (CXP), well above the ‘B’ me­dian of 3.9 months of CXP.

Fitch, how­ever, noted that $5 bil­lion of the re­serves has been pledged in for­ward po­si­tions.

It noted that the fed­eral gov­ern­ment’s in­abil­ity to sub­stan­tially in­crease do­mes­tic rev­enue mo­bil­i­sa­tion re­mained a key rat­ing weak­ness.

Non-oil rev­enue in­creased slightly in 2017 to 3.4 per cent of GDP “and will con­tinue grow­ing slowly as a re­sult of new rev­enue mea­sures and efforts to in­crease the tax base, but any in­crease comes from a very low base”.

“As a re­sult, gen­eral gov­ern­ment debt as a per­cent­age of rev­enue will in­crease to 311 per cent in 2018, com­pared with the ‘B’ me­dian of 240 per cent.

“The ra­tio of Fed­eral Gov­ern­ment of Nige­ria (FGN) debt to FGN rev­enue is even higher, es­ti­mated at 623 per cent as of end-2017.

“How­ever, rel­a­tive to GDP, gen­eral gov­ern­ment debt will only be 20.5 per cent of GDP in 2018, well be­low the ‘B’ me­dian of 61.5 per cent,” it added.

Fitch also fore­cast that in 2018 the gen­eral gov­ern­ment fis­cal deficit would con­tract slightly to 4.2 per cent of GDP, from an es­ti­mated 4.6 per cent in 2017.

It stated that the gov­ern­ment’s at­tempts at fis­cal consolidation have been hampered by low lev­els of tax cov­er­age and com­pli­ance, rigidi­ties in Nige­ria’s bud­get­ing frame­work, and con­sis­tent de­lays in ap­prov­ing bud­gets.

Fitch’s fore­casts were based on a con­ser­va­tive oil price as­sump­tion of USD57.5/b, so higher oil prices could re­duce the deficit sig­nif­i­cantly, if the wind­fall is not di­rected to­wards spend­ing.

“The bank­ing sec­tor has been aided by the eas­ing of foreign-cur­rency liq­uid­ity, but eco­nomic head­winds, com­bined with high loan con­cen­tra­tion, have eroded as­set qual­ity and cap­i­tal ad­e­quacy.

“The ra­tio of non­per­form­ing loans to to­tal loans in­creased to 15.1 per cent in third quar­ter of 2017, from five per cent in 2015, although pres­sures are likely to ease in 2018 and pro­vi­sion­ing cov­er­age is fairly healthy.

“Cap­i­tal ad­e­quacy fell to ap­prox­i­mately 10.6 per cent in the third quar­ter of 2017, from 18 per cent in 2015.

“Tight mone­tary con­di­tions have weighed on credit pro­vi­sion and credit to the pri­vate sec­tor con­tracted by 3.7 per cent in 2017.

“Nev­er­the­less, the sec­tor re­mains highly prof­itable and that is not ex­pected to change.

“The gen­eral elec­tion sched­uled for Feb­ru­ary 2019 could fur­ther weaken progress on the re­form agenda and ag­gra­vate on­go­ing se­cu­rity chal­lenges.

“Most im­por­tantly, any flare-up of in­sur­gent ac­tiv­ity in the oil-pro­duc­ing Niger Delta would hit fis­cal and ex­ter­nal rev­enues. In 2016 and 2017, in­creased in­sur­gent ac­tiv­i­ties caused a fall in oil pro­duc­tion to a low of 1.7mbpd,” Fitch noted. PRINTED AND DIS­TRIB­UTED BY PRESSREADER +1 604 278 4604 ORIG­I­NAL COPY . ORIG­I­NAL COPY . ORIG­I­NAL COPY . ORIG­I­NAL COPY . ORIG­I­NAL COPY . ORIG­I­NAL COPY COPYRIGHT AND PRO­TECTED BY AP­PLI­CA­BLE LAW

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