Fitch Ratings has downgraded Nigeria’s long-term foreign-currency issuer default rating (IDR) to ‘B’ from ‘B+, which means the outlook is negative.

The downgrade and negative outlook reflected the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock.

Intensifying external pressures raise risks of disruptive macroeconomic adjustment given Nigeria’s precarious monetary and exchange rate policy setting and lack of fiscal buffers.

The shock would also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession, Fitch ratings stated.

It stated that

“The plunge in international oil prices, which we assume will average of $35/barrel in 2020 after $64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57 per cent of current-account receipts and nearly half of fiscal revenue over the last three years.

“This shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria will not suffice to address deteriorating external imbalances, in our view.

“The CBN allowed the exchange rate on the Investor and Exporter window, on which the bulk of foreign-currency transactions is held, to depreciate by 6.7 per cent since mid-January and devalued the official exchange rate by 15 per cent in March.

“The scope of the enacted adjustment is small relative to magnitude of the shock as well as to the steep real effective exchange rate appreciation of more than 30 per cent since end-2016.

“Real appreciation was driven by persistent high inflation averaging 13.3 per cent in 2017-2019 amid rigid nominal exchange rates.

“Continued pressures on the naira are illustrated by the drawdown in international reserves, which declined by 9.4 per cent year-to-date, representing a cumulative fall of 22.5 per cent since their peak mid-July.”

Fitch Rating stated that reversal of international portfolio inflows in a context of a spike in global risk aversion could magnify the impact of the oil price shock.

Nigeria’s vulnerability to short-term capital outflows was high given the sizeable stock of portfolio investments in short-term naira debt securities, equivalent to $27.7billion (6.9 per cent of GDP) at end-2019 and representing around 72 per cent of FC reserves at the time.

Of these liabilities, $14.7bn was in non-resident investments in the CBN’s open-market operation bills that were attracted by high-interest rates and hedging instruments offered to non-residents at non-economic costs under the CBN’s policy of stabilising the exchange rate.

Continued reluctance to adjust the exchange rate, portfolio outflows and a wide current-account deficit would lead FC reserves to fall to 2.5 months of current account payments at end-2020 under our forecasts, well below the historical ‘B’ median of 3.8 months, and their lowest level since 1994.