Fitch: Nigeria’s outlook reversed from negative to stable

Fitch Ratings has revised the outlook on Nigeria’s long-term foreign-currency Issuer Default Rating (IDR) to stable from negative.

The international rating firm disclosed this in its report where it affirmed the IDR at ‘B’ saying the revision of the outlook reflected a decrease in the level of uncertainty surrounding the impact of the global pandemic shock on the Nigerian economy, it said.

Part of the report read, “Oil prices have stabilised, global funding conditions have eased and domestic restrictions on movement have started to be relaxed.

“Nigeria has navigated external liquidity pressures from the shock through partial exchange rate adjustment combined with de facto capital flow management measures and foreign-currency restrictions, while disbursement of external official loans has supported the level of international reserves.

“While external vulnerability persists from currency overvaluation and a possibly large FC demand backlog, this is adequately captured by the ‘B’ rating, in our view.”

It said the Central Bank of Nigeria (CBN) continued to prioritise exchange rate stability over other policy goals.

It said a six per cent depreciation in March of the investor and exporter exchange rate at which most foreign currency transactions were carried out fell short of fully correcting the naira’s appreciation by about 35 per cent in real terms between mid-2016 and February 2020.

Fitch report said steep real appreciation had been driven by persistent double-digit inflation, which had offset gains from the devaluations in 2016 and 2017.

It added that the CBN had achieved progress towards its stated goal of unifying the exchange rate, following a cumulative 19 per cent two-step devaluation of the ‘official’ exchange rate, which was mostly used for the government’s and the oil sector’s FC transactions.

It said, “The broad stability of the I&E rate since end-March has been mostly achieved through a severe contraction in FC supply, illustrated by a drop in the average value of daily transactions on the I&E window by 87 per cent in April-August relative to the 1Q20 average.

“Tightening FC supply for trade and financial transactions could harm growth and exacerbate inflationary pressures, driving further misalignment of the naira’s real exchange rate.”

It stated that inflation accelerated to a 29-month high of 13.3 per cent in August, and it expected it to average 13 per cent over the full year, well above the forecast ‘B’ median of five per cent.