Economy
Fitch Downgrades Nigeria to ‘B’ on Weak Fiscal Buffers
By Dipo Olowookere
Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been downgraded to ‘B’ from ‘B+ by Fitch Ratings, with the outlook negative.
In a statement issued on Monday, Fitch noted that the lowering of the rating was due to the pressures on the country’s external finances caused by crash in the prices of crude oil at the global market by coronavirus pandemic.
The Brent crude, under which Nigeria’s oil is priced, sold around $23 per barrel some weeks ago and only last week hit just over $30 when news hit town that Saudi and Russia will likely have discussions about the market situation.
Nigeria depends largely on crude oil sales for external revenue and according to Fitch, the intensifying external pressures raise risks of disruptive macroeconomic adjustment given the country’s “precarious monetary and exchange rate policy setting and lack of fiscal buffers.”
It said the shock will also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession.
Fitch said the shock will worsen the overvaluation of the Naira and remedial policy actions taken by the Central Bank of Nigeria (CBN), which it stressed will not “suffice to address deteriorating external imbalances.”
The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency (FC) transactions is held, to depreciate by 6.7 percent since mid-January and devalued the official exchange rate by 15 percent in March, the rating agency stated.
According to Fitch, Nigeria’s vulnerability to short-term capital outflows is high given the sizeable stock of portfolio investments in short-term Naira debt securities, equivalent to $27.7 billion (6.9 percent of GDP) at end-2019 and representing around 72 percent of FC reserves at the time.
“Of these liabilities, $14.7 billion was in non-resident investments in the CBN’s open-market operation bills that were attracted by high interest rates and hedging instruments offered to non-residents at non-economic costs under the CBN’s policy of stabilising the exchange rate.
“Continued reluctance to adjust the exchange rate, portfolio outflows and a wide current-account deficit (CAD) will lead FC reserves to fall to 2.5 months of current account payments at end-2020 under our forecasts, well below the historical ‘B’ median of 3.8 months, and their lowest level since 1994.
“We estimate that the CAD will widen to a record level of 4.9 percent of GDP in 2020, exceeding the historical ‘B’ median of 4.3%, under our assumption of only modest depreciation of the Naira.
“Nigeria’s long-standing current account surplus shifted to a deficit of 4.2 percent of GDP in 2019 on an upsurge in imports, chiefly of equipment goods.
“We project the CAD to narrow to 1.8 percent in 2021 reflecting partial recovery of oil prices to $45/b, import compression and tighter restrictions on FC access,” the agency said.
It further said the country’s external finances are highly vulnerable to a further fall in international oil prices below the current forecasts of about $34/b.
It noted that despite the expiry of production caps under the OPEC+ agreement, there is little scope to ramp up Nigeria’s oil production beyond the current assumption of 2.1 mbpd given capacity constraints and the build-up of a global supply glut on oil markets.
“Under a stable oil production assumption, a $10 drop in average Brent benchmark prices below our current projection would cause the CAD to widen by an additional 1.6 percent of GDP.
“Furthermore, the domestic oil sector’s operational breakeven is around $25-30/barrel, based on official estimates, meaning production cuts are likely should oil prices continue to hover well below $30/barrel,” it said.
Fitch further said the collapse in oil revenues and the slowdown in economic activity will take a toll on the government’s already weak fiscal revenues.
“This will be partly cushioned by the devaluation of the official exchange rate, which will boost fiscal oil revenues in Naira terms.
“In addition, the fall in international fuel prices will allow the government to eliminate the implicit fuel subsidy. Nigeria’s fiscal breakeven oil price is high, at $133/barrel under our estimates, given particularly low non-oil fiscal intakes.
“We project the general government (GG) deficit will widen to 5.8 percent of GDP (federal government, FGN: 3.1 percent) in 2020 from 3.8 percent (FGN: 2.4 percent) in 2019.
“There is limited scope for consolidation through spending cuts given fiscal rigidity from payroll and interest outlays, which will represent 150 percent of the FGN’s revenues and two-thirds of its expenditures in 2020. Cuts to other operational outlays and capital expenditures will be largely offset by higher spending on health services and support to sectors affected by the pandemic shock,” it stated.
By Adedapo Adesanya
The United Arab Emirates has announced its decision to quit the Organisation of the Petroleum Exporting Countries (OPEC) to focus on national interests.
This dealt a heavy blow to the oil-exporting group at a time when the US-Israel war on Iran had caused a historic energy shock and rattled the global economy.
The move, which will take effect on May 1, 2026, reflects “the UAE’s long-term strategic and economic vision and evolving energy profile”, a statement carried by state media said on Tuesday.
“During our time in the organisation, we made significant contributions and even greater sacrifices for the benefit of all,” it added. “However, the time has come to focus our efforts on what our national interest dictates.”
The loss of the UAE, a longstanding OPEC member, could create disarray and weaken the oil cartel, which has usually sought to show a united front despite internal disagreements over a range of issues from geopolitics to production quotas.
UAE Energy Minister Suhail Mohamed al-Mazrouei said the decision was taken after a careful look at the regional power’s energy strategies.
“This is a policy decision. It has been done after a careful look at current and future policies related to the level of production,” the minister said.
OPEC’s Gulf producers have already been struggling to ship exports through the Strait of Hormuz, a narrow chokepoint between Iran and Oman through which a fifth of the world’s crude oil and liquefied natural gas supplies normally pass, because of threats and attacks against vessels during the war.
The UAE had been a member of OPEC first through its emirate of Abu Dhabi in 1967 and later when it became its own country in 1971.
The oil cartel, based in Vienna, has seen some of its market power wane as the US has increased its production of crude oil in recent years.
Additionally, the UAE and Saudi Arabia have increasingly competed over economic issues and regional politics, particularly in the Red Sea area.
The two countries had joined a coalition to fight against Yemen’s Iran-backed Houthis in 2015. However, that coalition broke down into recriminations in late December when Saudi Arabia bombed what it described as a weapons shipment bound for Yemeni separatists backed by the UAE.
By Adedapo Adesanya
Central Securities Clearing System (CSCS) Plc bested four price decliners on the NASD Over-the-Counter (OTC) Securities Exchange on Monday, April 27. The alternative stock market opened the week bullish during the session with a 0.03 per cent uptick.
According to data, the security depository company added N2.61 to its share price to close at N76.26 per unit compared with the preceding session’s N78.87 per unit.
As a result, the market capitalisation of the platform increased by N820 million to N2.425 trillion from N2.424 trillion, and the NASD Unlisted Security Index (NSI) gained 1.38 points to finish at 4,053.97 points compared with the 4,052.58 points it ended last Friday.
The four price losers were led by NASD Plc, which slumped by N3.80 to sell at N34.70 per share versus N38.50 per share. FrieslandCampina Wamco Nigeria Plc fell by N1.45 to N98.10 per unit from N99.55 per unit, Food Concepts Plc slid by 27 Kobo to N2.43 per share from N2.70 per share, and Geo-Fluids Plc dipped by 9 Kobo to N2.91 per unit from N3.00 per unit.
The value of securities transacted by market participants went down by 82.0 per cent to N7.4 million from N41.3 million units, the volume of securities declined by 28.5 per cent to 319,831 units from 447,403 units, and the number of deals dropped by 34.1 per cent to 29 deals from 44 deals.
Great Nigeria Insurance (GNI) Plc was the most active stock by value on a year-to-date basis with 3.4 billion units worth N8.4 billion, followed by CSCS Plc with 59.6 million units sold for N4.0 billion, and Okitipupa Plc with 27.8 million units exchanged for N1.9 billion.
Also, GNI Plc was the most traded stock by volume on a year-to-date basis with 3.4 billion units valued at N8.4 billion, followed by Resourcery Plc with 1.1 billion units traded for N415.7 million, and Infrastructure Guarantee Credit Plc with a turnover of 400 million units worth N1.2 billion.
By Adedapo Adesanya
The first trading day of the week in the currency market was bearish for the Naira in the Nigerian Autonomous Foreign Exchange Market (NAFEX) on Monday, April 27.
Yesterday, it lost N5.80 or 0.43 per cent against the United States Dollar to trade at N1,364.24/$1, in contrast to the N1,358.44/$1 it was traded last Friday.
In the same vein, the Nigerian currency depreciated against the Pound Sterling in the official market by N13.70 to close at N1,847.72/£1 versus the preceding session’s N1,834.02/£1, and slumped against the Euro by N11.56 to sell at N1,602.29/€1 versus N1,590.73/€1.
Also, the Nigerian Naira tumbled against the greenback during the trading day by N5 to quote at N1,385/$1 compared with the previous rate of N1,380/$1, and at the GTBank FX desk, it traded flat at N1,370/$1.
The poor performance of the domestic currency could be attributed to liquidity shortage at the official currency market on Monday, which came amid surging demand for international payments. At $76.50 million, interbank liquidity printed higher across 79 deals, up from the $43.572 million reported on Friday.
Nigeria’s gross external reserves declined to $48.45 billion amid a month-long decline in inflows, amid uncertainties in the global commodity market. The depletion of foreign reserves could be partly attributed to the Central Bank of Nigeria’s intervention in the FX market.
The market remains perturbed by persistent concerns over liquidity constraints, policy transparency, and weakening confidence in Nigeria’s FX market, while boosters, including oil prices, continue to look rocky due to stalled discussions and unclear ceasefire negotiations between the US and Iran.
A look at the cryptocurrency market, Bitcoin (BTC) has been rejected near $79,000 three times in eight sessions, leaving the level as the de facto ceiling of its current trading range even as major cryptocurrencies trade lower over the past day. It lost 0.9 per cent to sell at $77,003.61.
Analysts say that upcoming US Federal Reserve policy decisions and top tech firms’ earnings this week could provide the catalyst to push bitcoin decisively above $80,000.
The market also continued to weigh Iran’s interim deal proposal to reopen the Strait of Hormuz, which failed to advance over the weekend. The White House said US officials were discussing the latest Iranian proposal but maintained “red lines” on any deal to end the eight-week war.
Solana (SOL) dropped 1.8 per cent to $84.25, Ripple (XRP) went down by 1.6 per cent to $1.39, Ethereum (ETH) depreciated by 1.3 per cent to $2,290.00, Binance Coin (BNB) declined by 0.5 per cent to $625.18, and Cardano (ADA) fell by 0.2 per cent to $0.2480.
However, Dogecoin (DOGE) rose by 2.0 per cent to $0.1002, and TRON (TRX) appreciated by 0.2 per cent to $0.3242, while the US Dollar Tether (USDT) and the US Dollar Coin (USDC) remained unchanged at $1.00 apiece.
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