Economy
Why Fitch may downgrade Nigeria’s credit rating – Analyst
BY EMEKA EJERE
One of the biggest credit rating agencies, Fitch Ratings, has disclosed its plans to downgrade Nigeria’s sovereign rating from B+ to negative if the constant attempt by the country to defend the Naira, despite the continuous decline in crude oil price, eats into the nation’s external reserves.
Sovereign credit rating usually refers to an independent assessment of the creditworthiness of a country or sovereign entity. It indicates the risk level of the investing environment of a county. This usually gives investors insights into the level of risk associated with investing in the debt of a particular country, including political risk.
In December 2019, Fitch Ratings revised the outlook on Nigeria’s long term foreign-currency issuer default rating (IDR) to ‘Negative’ from ‘Stable’, but affirmed the country’s sovereign credit rating at B+. However, Fitch’s Middle East and Africa sovereign analyst, Jan Friederich, hinted that the B+ rating could be revised downwards to negative.
Recalled that Standard and Poors, one of the big three credit rating agencies, in February reviewed downwards its outlook on Nigeria from ‘stable’ to ‘negative’ while affirming the country’s long and short-term sovereign credit ratings at ‘B/B’.
The development was mostly due to the decrease in the nation’s external reserve from $45.1 billion as of June 30, 2019, to about $38 billion as of January 31, 2020. The decline in the external reserve has persisted as it is now $36.18 billion.
Speaking in an interview with Reuters yesterday, Friederich stressed that if the recent huge drop in the price of crude oil persists, a further downgrade of the sovereign ratings of exporter countries with weaker finances and pegged exchange rates would most likely occur.
According to Friederich, oil prices are likely to stay low for some time and as such, the global rating firm would focus on some prominent oil-exporting countries like Saudi Arabia, Oman, Nigeria, Iraq and Angola.
He pointed out that Saudi Arabia’s financial reserves and its sovereign wealth fund provided a buffer but that there was no ‘infinite leeway’ in the country’s A (stable) rating for the buffers to disappear.
Nigeria’s B+ (negative) rating could face problems if sustained effort to defend the country’s currency further depletes the external reserves.