New Telegraph

Fitch downgrades Nigeria to B

Citing continued deterioration in government debt servicing costs and external liquidity, global credit rating agency, Fitch Ratings, has downgraded Nigeria’s long-term foreign-currency Issuer Default Rating (IDR) to ‘B-‘ from ‘B’, saying the outlook is stable. With this development, the agency now rates Nigeria six notches above default and on par with Ecuador and Angola. In a statement it released yesterday, Fitch said: “The downgrade to ‘B-‘reflects continued deterioration in Nigeria’s government debt servicing costs and external liquidity despite high oil prices in 2022.” The agency added: “Low oil production and the expensive subsidy on petrol have consumed most of the fiscal benefit of high oil prices in 2022 and will continue to stress already low government revenue levels. “If implemented, subsidy reduction in 2023 would benefit public finances, but constrained oil production and structurally low domestic non-oil revenue mobilisation will limit potential gains.”

Fitch said it expects that the implicit subsidy on petrol will cost the government approximately N5 trillion (2.4 per cent of GDP) in foregone revenue from the Nigerian National Petroleum Company in 2022, which will contribute to a widening of the general government (GG) fiscal deficit to 6.1 percent of GDP.

“The foregone revenue stems from the spread between the regulated pump price of petrol, which has averaged N190 per litre, and the import cost, which has averaged above N300 per litre. “The Petroleum Industry Act 2021 contains language mandating a move to a market price for refined fuel products, but plans to phase out the subsidy in 2022 were pushed back owing to higher global oil prices. “In 2023, our base case scenario sees a gradual narrowing of the spread between the pump price and true market price of petrol, which is in line with the government’s proposed 2023 budget.

“However, we expect a longer timeframe for completely phasing out the subsidy, and therefore a higher level of foregone revenue,” the agency said. It predicted that a new administration would likely introduce a supplemental budget next year. “Although the subsidy reform has broad-based political support, Fitch considers that there will likely be public pressure to continue the fuel subsidy. “Lower subsidy costs and a marginal improvement in oil production, will narrow the GG fiscal deficit, but we expect this to remain above 5 percent of GDP in 2023,” the statement said. Fitch forecasts Nigeria’s General Government (GG) debt to increase to 34 per cent of GDP by end-2022. “This includes the Federal Government’s overdraft with the Central Bank of Nigeria. It said: “Nigeria’s debt stock is low compared with the forecast 2022 ‘B’ median of 57.6 per cent of GDP.

“However, its debt servicing metrics are among the highest for Fitch-rated sovereigns. “We forecast government debt/revenue to increase to 580 percent in 2022 and interest/revenue to reach 47.7 per cent, compared with the current ‘B’ medians of 282 per cent and 10.8 per cent, respectively. “Both ratios will remain at broadly the same levels in 2023 before falling slightly in 2024. “At the central government level, Nigeria’s debt metrics are made worse because the FGN holds a higher percentage of GG debt relative to its share of GG revenue. “Interest payments reached 108 percent of FGN revenues in 1H22.”

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