The downgrade and negative outlook reflected the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock.
Intensifying external pressures raise risks of disruptive macroeconomic adjustment given Nigeria’s precarious monetary and exchange rate policy setting and lack of fiscal buffers.
The shock would also raise government debt and interest payment-to-revenue ratios from already particularly high levels and lead to a renewed economic recession, Fitch ratings stated.
It stated, “The plunge in international oil prices, which we assume will average of $35/barrel in 2020 after $64.1/barrel in 2019, highlights Nigeria’s high dependence on the oil sector, with hydrocarbon revenues representing 57 per cent of current-account receipts and nearly half of fiscal revenue over the last three years.
“This shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria will not suffice to address deteriorating external imbalances, in our view.
“The CBN allowed the exchange rate on the Investor and Exporter Window, on which the bulk of foreign-currency transactions are held, to depreciate by 6.7 per cent since mid-January and devalued the official exchange rate by 15 per cent in March.”
It also said, “Continued pressures on the naira are illustrated by the drawdown in international reserves, which declined by 9.4 per cent year-to-date, representing a cumulative fall of 22.5 per cent since their peak mid-July.”
Fitch stated that reversal of international portfolio inflows in a context of a spike in global risk aversion could magnify the impact of the oil price shock.
