Nigeria’s poor growth to inflate debt, Fitch says

Nigeria’s debt burden is set to increase due to weak economic growth in 2016, ratings agency Fitch said on Monday 17 October. The stagnant economic outlook for Nigeria has created an estimated budget deficit of 1.8tn naira ($5.7bn), which the government hopes to plug by borrowing from international lenders. 

The widening deficit is, however, unlikely to trigger a downgrade of Nigeria’s B+ credit rating, Fitch said. The ratings agency downgraded Nigeria’s credit rating to B+ from BB- in June of this year because of “increased fiscal and external vulnerability”. 

“We think the debt burden is sustainable, but it is increasing, while government revenues have fallen as a proportion of GDP,” it said. “General government debt and interest as a percentage of revenues, at 270% and 23% respectively, are considerably higher than the ‘B’ category median.”

The Nigerian economy is in recession for the first time in more than two decades, with the economy contracting by 2.1% in April to June 2016, the second consecutive quarterly fall. The fall in GDP is due to a decline in national revenue as a result of the global crash in oil prices. The price of brent crude oil has fallen from over $100 per barrel in June 2014 to $49.66 per barrel on 17 October.

Africa’s second largest oil producing country has seen crude oil output fall from 2.1m barrels per day (bpd) in January-March 2016 to 1.7m bpd in April-June, despite an improving situation in the Niger Delta. Militant groups in the region seeking to form a breakaway state have been targeting oil installations since February this year.

Meanwhile, the non-oil sector has also shrunk by 0.4% in the second quarter of the year because of the declining oil sector, energy shortages and a tightening of available foreign exchange for the domestic industries, Fitch said. As a result, Nigerian industries have reported eight straight months of declining production levels, new orders and raw material inventories since the beginning of the year. 

In the long-term, The Nigerian government is planning to increase borrowing next year from the World Bank and other international lenders to plug its budget deficit, rather than rely on domestic sources, according to Budget and National Planning Minister Udoma Udo Udoma.  

“There is going to be a shift to foreign, especially concessional debt,” he said. “Lower interest rates from foreign debt will help us manage our debt servicing, and also free domestic credit for the private sector.”

The African Development Bank (Afdb) has already offered Nigeria a $4.1bn loan, with $1bn advancement currently being negotiated by the bank. The Nigerian government’s budget – which was belatedly signed into law in May of this year after months of wrangling – has set aside additional capital expenditure to help stimulate the economy. The benefits of the 6.1tn naira ($30.6bn) budget, however, will not be immediately felt in this year, according to the ratings agency.

“Fitch expects that the government will secure financing from multilateral development banks and bilateral sources and will execute the bulk of its planned expenditure. However, timing remains unsure and some disbursements are unlikely until 2017,” it said.

Taku Dzimwasha