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Political uncertainty: Fitch reviews Nigeria’s Outlook to ‘Negative’

By Babajide Komolafe

Global Rating agency, Fitch Monday reviewed Nigeria’s long term outlook to ‘Negative’ from ‘Stable’, due to heightened political uncertainty in the context of a tightly contested presidential election and potential transition issues, and erosion of the nation’s external reserves.

The downward review of the long term outlook implies that the ability of the country to repay its debt in the long term is doubtful.

A statement issued by the company said, “Fitch Ratings has affirmed Nigeria’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BB-‘ and ‘BB’ respectively. The Outlooks on the Long-Term IDRs have been revised to Negative from Stable.

“The revision of Outlook on Nigeria’s IDRs reflects the following key rating drivers and their relative weights: Medium Political uncertainty is heightened in the context of a tightly contested presidential election and potential transition issues. The polls were officially delayed due to security concerns stemming from Boko Haram activity, however violence was very limited on election day and challenges were largely technical in nature. The government has made gains in the past few months in the fight against Boko Haram, but this follows a period in which the group seized large parts of the north east, where the threat remains largely contained.

“Fiscal and external buffers have been eroded significantly as Nigeria enters a period of lower oil prices and are well below the levels of the 2008/09 oil price shock. Oil accounts for around 60% of fiscal revenues and 75% of current external receipts. The Excess Crude Account (ECA, the key fiscal buffer) stood at USD2bn at end-2014, down from USD19.7bn at end-2008. Foreign exchange reserves were equivalent to 3.8 months of current external payments at end-2014, compared with 7.8 months at end-2008. Fitch does not expect savings to be rebuilt significantly by end-2016. High dependence on oil revenues will cause the external position to deteriorate despite a rapid policy response.

“Fitch forecasts the current account to fall into deficit in 2015 for the first time since 1998 owing to lower oil prices. A modest surplus is expected in 2016. Economic performance is likely to weaken, although non-oil growth will remain robust. Real non-oil growth is forecast to slow to 5.5% in 2015, from 7.4% in 2014 and an average of 5.6% over the past five years. Non-oil growth will be hit by the devaluation of the naira and election-related uncertainty, but will be less impacted by fiscal consolidation due to the small size of the government.

“Reforms in the power and agricultural sectors should continue to support underlying momentum. Exchange rate devaluation is forecast to push inflation into low double digits for the first time since 2012.

“The main factors that could lead to a rating downgrade are: – A serious and prolonged breakdown in public order – Erosion of fiscal and external buffers and an inadequate policy response that seriously undermines confidence – Reversal of key structural reforms The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to the Outlook returning to Stable: – A smooth electoral process and reduced political uncertainty – Strengthened buffers, either in the ECA/international reserves or the sovereign wealth fund – Containment of fiscal pressures that keep the debt burden manageable.”


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