Nigeria’s inflation topped 32.7 per cent in September reacting to the exchange rate pass-through and higher prices of essential commodities.
The rating agency, however, noted that inflation may hover around 33 per cent for the rest of the year.
According to Fitch, the Central Bank of Nigeria (CBN) is not done with its tightening as the authority may increase the Monetary Policy Rate (MPR) in the current quarter (Q4) and adopt prudential and operational tools such as open market operations to strengthen policy transmission.
The negative effects of floating the naira, increase in electricity tariffs and removal of fuel subsidies have led to high transportation fares, high costs of food and rising inflation causing economic hardship on hapless Nigerians are not highlighted by the report by Fitch.
In giving pass marks to the policies, Fitch affirms Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a positive outlook.
Coincidentally, the rating further affirms the stance of the World Bank and International Monetary Fund (IMF) that Nigeria is on the right track with its economic policies.
The rating agency based its positive rating on the large size of the economy, relatively developed and liquid domestic debt market as well as large oil and gas reserves.
However, the rating is constrained by weak governance indicators relative to peers, high hydrocarbon dependence, weak net foreign exchange reserves, high inflation, ongoing security challenges, and structurally low, albeit improving, non-oil revenue.
It submitted that the positive outlook reflects progress in implementing reforms that improve policy coherence and credibility as well as reduce economic distortions and near-term risks to macroeconomic stability.
“These include exchange rate liberalisation, monetary policy tightening and efforts to restore fiscal discipline, including the absence of deficit monetisation in recent months and phasing out fuel subsidies. The subsequent rise in foreign portfolio investment inflows, greater formalisation of FX activity and official FX inflows ($48 billion in 1H24, compared with $34 billion in 1H23) have supported the recovery in international reserves,” the report stated.
Nonetheless, it pointed out that short-term challenges remain, adding: “The exchange rate remains volatile and capital inflows have decreased in recent quarters despite high market yields, possibly due to investor concerns over the durability of the reform programme. Additionally, continued high fiscal spending along with exchange rate liberalisation, supply shocks and the deregulation of gasoline prices (resulting in a near 65 per cent year-on-year rise in September 2024) has accentuated Nigeria’s structurally high inflation.”
The efforts of the CBN to address the forex debacle did not go unnoticed in the report.
It mentioned the plans to introduce an electronic FX matching platform for all FX transactions effective 1 December 2024, to provide intra-day prices in real-time and enhance transparency.
The CBN has also raised the monetary policy rate five times by a cumulative 850bp to 27.25 per cent since February 2024.
With all these steps taken so far, Fitch believes that the FX market is yet to stabilise and the ongoing flexibility of the exchange rate remains to be tested.
Gross FX reserves have risen to over $39 billion from 32.1 billion in mid-April, driven by official disbursements, remittances, portfolio inflows and an improved trade balance are indications of reduced external liquidity risk.
The report highlighted the role lower petrol import plays in the metrics, saying: “The latter is due to lower imports amid rising domestic refining production and the impact of currency depreciation on domestic demand. We forecast FX reserves to rise to 6.1 months of current external payments at ending 2024 and to average 5.3 months in 2025-26.”
While admitting there is significant uncertainty over the size of net reserves, Fitch estimates that around one-quarter of current gross reserves are made up of FX swaps with local banks, adding that most of these would continue to be rolled over.
The UK-based rating agency observed that with Dangote Petroleum Refinery coming onboard and meeting slightly above half of the 50 million litres daily consumption with its 30 million litres per day currently, the refinery would continue to rely on foreign markets for a portion of its crude oil due to Nigeria’s limited production capacity, sourcing about 59 per cent domestically at commercial prices.
The agency disclosed that it expects crude oil production to hit 1.4 million barrels per day in 2025 and 2026 up from 1.23 barrels per day, hinging its optimism on improved onshore surveillance.
Fitch forecasts the budget deficit to widen 0.4pp in 2024 to 4.6 per cent of GDP due to higher wages, debt servicing costs and social and security-related expenses.
On rising debt, Fitch said it expects General Government (GG) debt/GDP to rise to 52.1 per cent in 2024 (‘B’ median 53.7 per cent) as a wider deficit and naira depreciation outweigh support from a high GDP deflator.
“Government external debt service is expected to rise to 4.5 billion dollars in 2024 and five billion dollars in 2025, with 3.2 billion dollars of amortisations, including a 1.1 billion dollars Eurobond repayment due in November. The government plans to meet its external financing obligations through a combination of multilateral lending, syndicated loans, and potentially commercial borrowing.”
According to the report, the Nigerian banking sector may face challenges regarding regulatory non-performing loans to increase in 2024 due to high inflation and interest rates.
The Fitch rating does not expect the planned paid-in capital requirements for all banks and the Senate’s imposition of a 70 per cent tax on realised FX revaluation gains booked by banks as a result of recent currency devaluation to lead to capital adequacy ratio requirement breaches because the implementation of the two decisions will be staggered over multiple years.
