Barely two weeks after New-York based rating agency, Moody’s, downgraded its outlook for the Nigerian economy, Fitch Rating on Thursday did the same, with both forecasting a gloomy outlook for 2020.
The US-based rating agency revised its outlook for the Nigerian economy to negative and affirmed the rating at B+.
The downward revision, Fitch said, was as a result of Nigeria’s increasing vulnerability from its current macro policy setting, raising the risk of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira.
Early this month, Moody’s hammered Nigeria with a negative rating, in what it said was due to increased fragility of the country’s public finances and sluggish growth prospects. Moody’s also downgraded the outlook for Nigerian banks as well as their counterparts in other African countries. This sent stocks of listed firms to lower lows as investors reacted to the downward rating.
Like Moody’s, the downward rating by Fitch has serious implications on the health of Africa’s largest economy, especially at a time when the economy requires enough investment oxygen to breathe, analysts who spoke to BusinessDay said.
High borrowing cost
Being downgraded can have a big impact on a country’s ability to borrow money from the markets, as investors see it as a riskier bet and demand higher returns to lend to governments, according to Gbolahan Ologunro, an equity researcher at CSL Stockbrokers.
“But for falling yields in advanced countries, Nigeria would have had to pay at a higher interest than it did on offshore borrowings,” he said.
Nigeria plans on borrowing about $22.7 billion from various sources to fund 39 projects across various sectors from transportation to education.
Already, in the 2020 budget, Nigeria plans to spend almost a third of its projected revenue to service its debt that has almost tripled to N25 trillion in the last four years.
With a revenue projection of N8.42 trillion in the 2020 fiscal year, debt servicing is expected to gulp N2.452 trillion or 29 percent, according to a statement by Zainab Ahmed, minister of finance, budget and national planning. That’s high when compared to the 14.5 percent used in servicing debt in 2019.
With dwindling revenue in the wake of falling oil prices, it would become difficult for the government to meet its financial obligation.
According to Fitch, Nigeria’s debt remains on an upward path, while particularly low fiscal revenues and structural shortcomings in public finance management constrain the sovereign’s ability to support a rising debt burden.
Such a weakness, Fitch says, is illustrated by rising monetary financing, a large and uncertain amount of government arrears, and a multitude of contingent liabilities on which transparency is poor.
“This has made the government look on the Central Bank for life support, with net claims by the CBN on the FGN reaching an all-time high of 3 percent of GDP in August, equivalent to Federal Government revenue,” Fitch said.
Exchange rate pressure
With Nigeria’s downgrade to negative from two of the world’s biggest rating agencies, the risk associated with short-term assets including the CBN’s OMO and the treasury bills will likely increase, thereby putting pressure on the exchange rates as portfolio investors scale down on exposure to Nigerian asset.
Last month, the central bank barred non-bank local investors from participating in its N14 trillion OMO market.
This has resulted in an influx of non-foreign institutional investors in the treasury bills market, crashing the average yields to as low as 7 percent, according to FMDQ data.
With inflation at a record high of 11.9 percent in November, real yields stood negative at -4 percent.
Fitch says the lower liquidity in the OMO market due to the narrower range of participants is likely to have dampened net portfolio inflows, contributing to a 12 percent drop in FX reserves in November from end-June to their lowest level in two years.
Declining FX reserves
The downgrade to negative can further lead to shrinking reserves as the country continues to cushion the effect of increasing outflows.
Last month, the CBN said it saw no adjustment in its exchange rate in sight, except its reserves fall below $30 billion while oil price, which accounts over 85 percent of the country’s exchange earnings, falls below $45 per barrel.
Nigeria’s reserves as of December 19 stood at $38.9 billion, according to CBN data, showing a decline of about $6.1 billion from the start of the year.
Fitch noted that under Nigeria’s current economic framework, a sharp devaluation of the currency will stoke macroeconomic volatility and significantly weaken some of the country’s key credit metrics, including its gross domestic product per capita in dollars and its share in world GDP.
The naira closed 364/$, Friday, at the I&E window.
Fitch says the substantial appreciation of the naira over the last years is uncorrelated with macroeconomic fundamentals and is set to continue, driven by high inflation.
Weak investor sentiment
The Nigerian stock market has fallen to a negative return of 15.16 percent, based on data obtained from Bloomberg terminal, as investors look beyond juicy returns from quoted companies to await far-reaching reforms, especially from the monetary side.
The downgrade to negative by Fitch could further exacerbate investors’ already weak sentiments.
MICHAEL ANI
