Fitch, an international credit rating organisation, has downgraded Nigeria’s economic outlook from stable to negative while affirming the B+ rating.
In a fresh report obtained by Nairametrics, Fitch stated that the downgrade of Nigeria’s economic outlook is traceable to the disruptive macroeconomic policies under the administration of President Muhammadu Buhari.
In the report, the American rating firm stated that the increasing vulnerability from the current macro-policy setting has raised risks of disruptive macroeconomic adjustment in the medium terms and continued a real appreciation of the Naira.
According to Fitch, a sharp devaluation of the exchange rate under the current policy framework would stoke macroeconomic volatility and significantly weaken some of Nigeria’s key credit metrics, including its GDP per capita.
Fitch also noted that the substantial real appreciation of the naira over the last year appeared uncorrelated with macroeconomic fundamentals and was set to continue, driven by high inflation.
It was stated that commodity terms of trade had deteriorated somewhat and would decline further, weighed down by lower oil prices.
Rising debts and weak reforms
Fitch further disclosed that debt remains on an upward path in Nigeria while particularly low fiscal revenues and public fund mismanagement constrain the sovereign’s ability to support a rising debt burden.
Fitch predicts that debt/revenue ratio which is particularly high, at 333% (Federal government (FGN), debt: 777%) in 2019, will rise close to 400% (FGN debt: 922%) in 2021, well above the forecast ‘B’ median of 248%.
Weaknesses in public fund management are illustrated by rising monetary financing, a large and uncertain amount of government arrears, and a multitude of contingent liabilities on which transparency is poor.
Fitch forecasts that as Nigeria’s low non-oil fiscal revenues linger, the government deficit will deepen.
Also, inflation is high and poised to accelerate. Fitch projects Nigeria will average 13% in 2020-2021 from 11.3% in 2019, well above the forecast ‘B’ median of 5% and inflation rates in Nigeria’s main trade partners.
According to Fitch, the acceleration in inflation will be driven by a host of recently enacted policy measures which include the upcoming raise of the VAT rate, 66.7% hike of the minimum wage, as well as the recent closure of land borders to foreign trade and tightening restrictions on FX financing for a wide range of imports.