Fitch Upgrades Nigeria’s Credit Outlook
Against the backdrop of increasing economic hardship in the country, Nigeria’s fiscal and monetary policies reforms have continued to attract positive ratings.
The credit rating upgrade implies that Nigeria is getting financially healthier in terms of credit worthiness, an important basis for borrowing from the international financial system.
The upgrade was based on three major reforms, namely, Foreign exchange liberalization, fuel subsidy removal and recent electricity tariffs hike.
Fitch, in a statement on May 3, said the positive outlook partly reflects reforms implemented over the past year to support the restoration of macroeconomic stability and enhance policy coherence and credibility.
“Exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria (CBN) improved, central bank financing of the government scaled back and administrative efficiency measures are being taken to raise the currently low government revenue, as well as oil production,” Fitch said.
Fitch said the reforms have lessened distortions stemming from previous “unconventional monetary and exchange rate policies,” leading to the return of sizeable inflows to the official foreign exchange (FX) market.
“Nevertheless, we see significant short-term challenges, notably, inflation is high and the FX market has yet to stabilise, and the durability of the commitment to reform is to be tested,” the credit agency said.
“The CBN has stepped up efforts to reform the monetary and exchange rate framework following last year’s unification of the multiple exchange rate windows, and the large differential between the official and parallel market rates has collapsed.
Average daily FX turnover at the official FX window has risen sharply from 2H23, and there has been clearance of USD4.5 billion of the backlog of unpaid FX forwards (the validity of the outstanding USD2.2 billion is being assessed by CBN), and weekly sales of FC to bureaux de changes (BDCs) have resumed (having been suspended since 2021).”
‘Return of sizeable non-resident inflows’
Fitch said increased formalisation of FX activity and monetary policy tightening has contributed to a notable rise in foreign portfolio investment inflows and a fast appreciation of the naira at the official FX window.
According to the company, this followed the 71 percent “post-liberalisation depreciation between June 2023 and mid-March 2024”.
However, the credit rating agency said the exchange rate remains volatile.
Fitch said the continued lack of clarity on the size of net FX reserves is a constraint on Nigeria’s sovereign’s credit profile.
‘Further monetary policy tightening anticipated’
In March, the Central Bank of Nigeria (CBN) raised the monetary policy rate (MPR), which benchmarks interest rates, from 22.75 percent to 24.75 percent.
Fitch said it expects further increases in the CBN monetary policy rate in the second half of 2024 and “strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR”.
“We project inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%,” Fitch said.
In December 2023, Moody’s, a US-based rating agency, also revised its outlook for Nigeria from stable to positive.
