Analysts at Afrinvest Securities have faulted the recent upgrade of Nigeria’s macroeconomic outlook to stable by Fitch Ratings as there were still severe foreign exchange and fiscal risks that show less optimistic view of the economy.
After downgrading Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B+’ with a negative outlook in April 2020 due to COVID-19 pandemic, Fitch Ratings has revised its Nigerian outlook to stable citing reduced uncertainties, stable oil prices and the reopening of the economy.
The rating action was also influenced by Central Bank of Nigeria (CBN)’s management of external liquidity pressures through partial exchange rate adjustment, capital controls, foreign exchange (forex) restrictions and the rise in external reserves following the disbursement of International Monetary Fund (IMF)’s $3.4 billion Rapid Financing Instrument (RFI).
Afrinvest Securities stated that the revision to the rating was surprising given that severe external and fiscal financing pressures persist.
According to analysts, while Fitch alluded to stable oil prices, the potential threat to oil demand from the second wave of the pandemic is putting downward pressure on prices. The slow and uneven recovery in global oil demand is also expected to linger till the end of 2021, implying that oil prices would remain below 2018 levels while uncertainties still abound in the oil market due to global geo-political tensions.
Analysts pointed out that beyond oil and gas exports which only accounts for 35.8 per cent of current account receipts, inflows from foreign investment and remittances are expected to sharply reduce, noting that the external reserve of $36.2 billion, despite inflows from IMF, was still a drop of 15.5 per cent so far this year.
“Meanwhile the adjustments to the official exchange rate from N307.0/$1.0 to N380.0/$1.0 in August and the slight weakness in the NAFEX to N380.0/$1.0 from N360.0/$1.0 are too weak to correct the shock from weak oil prices, falling remittances and reduced capital flows. The restrictions on forex demand and the existing forex demand backlog have brought about a significant premium of around N79.0 in the parallel market, which we now consider to be a more market-reflective segment,” Afrinvest Securities stated.
Analysts noted that the rating agency also acknowledged the persistence of external vulnerabilities due to an overvaluation of the naira and a large forex demand backlog.
According to analysts, the implication of the measures CBN has adopted appeared to be understated by Fitch, despite citing the impacts in the form of poor investor confidence, slow growth recovery and trade weakness. With foreign investors still holding around $10.0 billion of Open Market Operations (OMO) bills as at August 2020 according to Fitch, there remains severe risks to the external reserves and the currency, especially given weak prospects for the recovery of oil and non-oil sources of forex supply.
“With debt service to revenue at 72.2 per cent between January and May 2020, the Federal Government’s fiscal position is under pressure. This is a more prominent debt sustainability risk than Nigeria’s low debt to Gross Domestic Products (GDP) ratio of around 20.4 per cent, since revenue collection has been underwhelming and below peers at less than 10.0 per cent of GDP. While we believe the subsequent adjustment to the official exchange rate to N380.0/$1.0 in August, removal of energy subsidies and the recovery in oil prices since second quarter 2020 would have supported revenues in third quarter 2020, we suspect that this would not be enough to significantly close the fiscal funding gap. Accordingly, we are a little less optimistic than Fitch that recent developments have lowered Nigeria’s external and fiscal risks,” Afrinvest Securities stated.
– The Nation