Credit rating agency, Fitch Ratings, has improved Nigeria’s credit rating outlook to positive.
It stated that the positive outlook partly shows changes made in the last year to help bring back stability to the country's economy and improve policy coherence.
The latest rating, the second positive outlook in the current administration, comes six months after it raised foreign-currency issuer default outlook to ‘B-‘ with a stable outlook.
It mentioned that progress in reforms since President Bola Tinubu took office in May of last year was faster than it expected.
“The Positive Outlook partly reflects changes made in the last year to help bring back stability to the country's economy and improve policy coherence and credibility,” Fitch said in a statement obtained by our correspondent on Friday.
“Exchange rate and monetary policy frameworks have been adjusted, fuel subsidies reduced, coordination between the ministry of finance and the Central Bank of Nigeria 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.”
It also kept Nigeria’s long-term foreign-currency issuer default rating at B-.
The ratings firm had previously expressed concerns that weak governance, security challenges, high inflation, structurally low non-oil revenue, high hydrocarbon dependence, and weakness in the exchange-rate framework would restrict economic growth in the West African nation.
Yet, it also expressed hope that Tinubu would carry out market-friendly reforms, in contrast to predecessors who pursued unorthodox policies that deterred investment.
Tinubu, who marks a year in office this month, has started making policy changes including reducing costly fuel and electricity subsidies, while allowing the naira to trade more freely.
Fitch added that the reforms have reduced distortions from previous unusual monetary and exchange rate policies, resulting in the return of large inflows to the official foreign exchange market.
It further explained that a 70 per cent depreciation and savings from the reduction in subsidies have boosted the government’s naira income and improved its fiscal outlook. Investors have largely welcomed the measures, with Nigerian stocks rallying to a record high and dollar bond yields declining.
“The reforms have reduced distortions from previous unusual monetary and exchange rate policies, resulting in the return of large inflows to the official foreign exchange 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 government has said it’s seeking to boost its tax-to-revenue ratio to about 18 per cent of gross domestic product from 10 per cent currently, one of the lowest levels globally. It also hopes to cut the ratio of revenue that goes to debt service to 45 per cent this year from about 98 per cent in 2023.
Efforts to reduce the burden of paying back debt have become more difficult because the local interest rates have increased by 600 basis points. The central bank is trying to control rapidly increasing inflation, which is currently at its highest level in 28 years.
The amount of money owed by Africa’s most populous nation has increased more than seven times since 2015, reaching N108 trillion by December. 39 per cent of this debt is owed to external lenders, including multilateral and commercial lenders.
Fitch expects the CBN monetary policy rate to go up further in the second half of 2024, following the 600bp increase to 24.75 per cent since February 2024 and the tightening of reserve necessities. They also anticipate the strengthening of monetary policy transmission, after the recent return of open market operations at rates closely connected to the MPR. Fitch predicts that inflation, which went up to 33.2 per cent yoy in March due in part to exchange rate pass-through and rising food prices, will average 26.3 per cent in 2024 and 18.2 per cent in 2025, still well above our projected ‘B’ median of 4.5 per cent.
