The London-based Fitch Ratings has, thus, affirmed Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘B-‘ with a Positive Outlook.
This 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 notably the removal of fuel subsidies, floatation of the naira as well as increment in electricity tariffs amid stagnated income and falling purchasing power of Nigerians.
The rating agency based its positive rating on the large size of the economy relatively developed and liquid domestic debt market, and large oil and gas reserves.
However, it observed that 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 then submitted that the positive outlook reflects progress in implementing reforms that improve policy coherence and credibility, and 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 (USD48 billion in 1H24, compared with USD34 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 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) have accentuated Nigeria’s structurally high inflation.”
The efforts of the Central Bank of Nigeria (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 has yet to stabilise, and the ongoing flexibility of the exchange rate remains to be tested.
