Nigeria's Credit Outlook Upgraded by Fitch Amid Market-Friendly Reforms

Key Takeaway

• Fitch upgrades Nigeria's debt outlook to positive, citing President Tinubu's market-friendly reforms and improved fiscal outlook.
• Reforms include reducing subsidies and allowing the naira to trade more freely, leading to a 70% depreciation but rallying stocks and lowering bond yields.
• Despite challenges like a high debt-service ratio and inflation, Nigeria aims to improve its tax revenue ratio and reduce reliance on debt.

Fitch Upgrades Nigeria's Outlook

Fitch Ratings has revised Nigeria's credit rating outlook to positive from stable, a significant shift that comes just six months after the agency had anticipated a slower pace of reform under President Bola Tinubu's administration. Since taking office in May of the previous year, Tinubu has implemented a series of policy changes aimed at bolstering the nation's economy, which Fitch acknowledges has surpassed expectations. The agency affirmed Nigeria’s long-term foreign-currency issuer default rating at B-, indicating a cautious optimism about the country's financial health.

"The Positive Outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility," Fitch stated. This upgrade reflects a recognition of the efforts made by the Nigerian government to address longstanding economic challenges, including high inflation and dependence on hydrocarbon revenues, which have historically hindered growth.

Policy Reforms Under Tinubu

President Tinubu's tenure has been marked by a commitment to market-friendly reforms, contrasting with the unorthodox policies of his predecessors. Key initiatives have included the reduction of fuel and electricity subsidies and allowing the naira to trade more freely. These measures have led to a nearly 70% depreciation of the naira but have simultaneously improved the government's fiscal outlook by increasing naira income and reducing subsidy-related expenditures.

Fitch highlighted the positive impact of these reforms, noting, "The reforms have reduced distortions stemming from previous unconventional monetary and exchange rate policies, resulting in the return of sizable inflows to the official foreign exchange market." The agency's acknowledgment underscores the broader market approval of Tinubu's policies, as evidenced by a rally in Nigerian stocks to record highs and a decline in dollar bond yields.

Economic Challenges and Goals

Despite the positive outlook, Nigeria continues to face significant economic challenges. The government aims to increase its tax-to-revenue ratio from the current 10% of gross domestic product (GDP) to about 18%, one of the lowest levels globally. Additionally, there is a goal to reduce the ratio of revenue that goes to debt service from about 98% in 2023 to 45% this year. These targets highlight the administration's focus on improving fiscal sustainability and reducing reliance on debt.

However, efforts to cut the debt-service burden are complicated by a 600 basis-point increase in local interest rates, implemented as part of the central bank's strategy to curb inflation, which has reached a 28-year high. Public debt has also seen a significant increase, rising more than seven-fold since 2015 to 108 trillion naira as of December, with 39% owed to external creditors.

Street Views

• Fitch Ratings (Bullish on Nigeria):

  "The Positive Outlook partly reflects reforms over the last year to support the restoration of macroeconomic stability and enhance policy coherence and credibility."