Zainab Ahmed


The Nigerian debt stock has expanded significantly amidst rising cases of Coronavirus which resulted in lockdown and stoppage of economic activities.  Due to increasing leverage to save the economy from collapse, Fitch Ratings has projected 30.7% debt to gross domestic product (GDP) for Nigeria in 2020.

 In its special report on Sub-Saharan Africa, Fitch said Coronavirus will lead to first GDP contraction in a decade in the region. Government revenue has declined, and rampaging COVID-19 underscore a gloomy outlook in the short to medium term as the nation resorts to borrowing.

 Analysts at GTI Securities Limited said that reduced revenue estimate means that the government will return to both the domestic and external market to take-up more borrowings to fund her spending projections.

 “Going forward, at least 85% of every naira earned by the federal government will be spent on debt servicing in the short-to-medium term”, GTI Securities stated.

 The firm said that based on estimate after adjusting the existing debt service to revenue ratio of 60% for the new reduced revenue projection and increased deficit, government revenue and foreign exchange earnings will drop significantly in the near term. Hence, the naira exchange rate will remain volatile.

Also reacting to the Fitch report, Research analysts at LSintelligence Associates said that means for every $100 slice of the economy, more than $30 could be used to pay off the country’s creditors.

 Meanwhile, the data shows that the ratio will worsen in 2021 as it projected debt to GDP of 21.2%. This is due to the rising debt profile of the nation without a commensurate increase in revenues from both the oil and non-oil sectors. Already, the debt to revenue has been pressured by the Coronavirus pandemic that ushered in economic lockdown.

While the need to borrow is quite understandable, FG is doing close to nothing to diversify the country’s earnings, analysts told MarketForces. The downgrade to ‘B’ from ‘B+’ and the negative outlook reflects the aggravation of ongoing pressures on Nigeria’s external finances following the recent slump in oil prices and the pandemic shock, Fitch explained.

 However, it stated that intensifying external pressures raise risks of disruptive macroeconomic adjustment given the nation’s precarious monetary and exchange-rate policy setting and lack of fiscal buffers.

“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.

 Severe Oil Shock Impact

 Fitch ratings explained that the plunge in oil prices and production cuts under the most recent OPEC+ agreement highlights Nigeria’s high dependence on the oil sector. Hydrocarbon revenue represents 57% of current-account receipts and nearly half of fiscal revenue over the past three years, it added.

 The ratings firm said in its view, this shock exacerbates the overvaluation of the naira and remedial policy actions taken by the Central Bank of Nigeria (CBN) will not suffice to address deteriorating external imbalances.

Vulnerability to Portfolio Outflows

 Fitch remarked that Nigeria is vulnerable to capital outflows given the sizeable stock of portfolio investments in short-term naira debt securities. This is equivalent to $27.7 billion or 6.9% of GDP at end-2019, representing around 72% of foreign currency (FC) reserves at the time.

 “Of these liabilities, $14.7 billion was in non-resident investments in the CBN’s open-market operation bills. Nigeria’s total debt profile has now risen to N25.7trillio, as a result of the crisis which has forced the government to borrow”.

 “Portfolio holdings fell by 46% in the first quarter of 2020 according to the IMF but Foreign Credit reserves dropped by just $5 billion between end-December and end-April despite only limited naira depreciation.

“This reflects tighter FC access, which has contained capital outflows temporarily, but the build-up of pent-up FC demand may increase the risk of a disruptive future exchange-rate adjustment”, the firm explained.

Weak Fiscal Revenues

In the report, the ratings firm stated that low fiscal revenue presents a major challenge to debt sustainability. Fitch said gross general debt will edge up to 520% of revenue (FGN: 1382%) in 2021 from 348% (FGN: 684%) in 2019, widening the gap with the historical ‘B’ median of 214%.

 “We expect the government to secure $5.4 billion from the IMF and other multilateral creditors covering 21% of its funding needs in 2020”, it explained.

 The relatively developed financial sector underpins the sovereign’s financing flexibility.

The ratings firm said the pandemic shock will push the Nigerian economy into its deepest recession since the early 1980s. A weak operating environment and high exposure to the oil sector could lead to further deterioration in bank asset quality, Fitch stated.

Explaining its estimates, the ratings firm stated that coronavirus pandemic, and the oil price shock it triggered, has had a severe impact on sovereigns in sub-Saharan Africa (SSA). Median real GDP for Fitch-rated SSA sovereigns will contract by 2.1% in 2020 with growth in 2021 of 4%, barely above-trend growth.

 Fitch Ratings has downgraded seven of the 19 rated SSA sovereigns since the beginning of March 2020. However, the report stated that four sovereigns in the region have Negative Outlooks on their rating, which is unusually high, pointing to continued downside risks to ratings.

 Four sovereigns are rated ‘CCC’ or below while only one (Cote d’Ivoire) carries a Positive Outlook.

Fitch Ratings stated that the global shock has had a strong impact on the SSA region via commercial and financial linkages, and domestic containment measures – with many countries imposing lockdowns and curfews – have caused severe disruption to economic activity in many countries.

 “The shock has hit the main African oil exporters – Angola, the Republic of Congo, Gabon and Nigeria – particularly hard given their high reliance on oil revenue for fiscal and external financing and the indirect dependence of the non-oil sector on oil revenue”, the ratings firm explained.

 Experts stated that the fall in revenue, combined with additional spending from the healthcare sector, will lead to a surge in deficits and debt levels in 2020; for a majority of countries, debt will continue to rise in 2021.

 Debt levels in many countries have been on an upward trajectory over the past decade, which has brought median government debt to 80% of GDP in 2020 from 60% of GDP in 2019, with a stabilisation of the ratio in 2021 mostly due to a recovery of nominal GDP, the denominator.

 “While global financial conditions have stabilised somewhat, access to commercial financing remains constrained on international markets and domestic debt markets are often shallow, raising the risk of liquidity challenges”, Fitch explained in the report.

 The IMF has responded by expanding its rapid financing instruments, which 12 of the 19 sovereigns have accessed, and more countries are expected to agree to regular IMF programmes that would open up other bilateral and multilateral funding.

It would be recalled that the leading 20 developed economies (G20) recently approved a Debt Service Suspension Initiative under which bilateral debt service payments due until end-2020 are now potentially extended until 2021. Cameroon, the Republic of Congo and Ethiopia have signed an agreement while others, including Cote d’Ivoire and Nigeria, have requested participation.

“As Fitch’s Issuer Default Ratings (IDRs) only refer to defaults on commercial debt, participation would not constitute a default. While a broader private sector moratorium could qualify as a default, this does not seem sufficiently likely to affect ratings”, Fitch explained.