Higher Global Oil Prices Support Rating: Higher global oil prices will improve external liquidity and support near-term economic growth. These gains must be balanced against Nigeria’s high reliance on hydrocarbons, which makes it vulnerable to negative oil price shocks, and structurally low domestic revenue mobilization. Fuel subsidies will be maintained, limiting the impact of higher oil prices on Nigeria’s public finances. Forecasts are based on Fitch’s December 2021 oil price assumptions (USD70 per barrel in 2022 and USD60 per barrel in 2023), but Fitch has taken into account alternative oil price scenarios, including current oil prices. While significantly higher oil prices may result in a higher Fitch Sovereign Rating Model (SRM) outcome, we may consider such a change to be temporary and reflective of Nigeria’s high exposure to oil prices.
Improved External Liquidity: Higher oil export receipts have boosted Nigeria’s gross international reserves, which will continue in 2022. We anticipate that reserves will rise to USD43 billion in 2022, up from USD40.5 billion at the end of 2021. We estimate that the combination of oil exports and remittance inflows contributed to the current account (CA) returning to balance in 2021, following a deficit of 4.2 percent of GDP in 2020. Our baseline assumption is that the CA balance will remain broadly unchanged in 2022, but sustained higher oil prices at their current level of USD112 per barrel could increase Nigeria’s current account surplus to 4% of GDP in 2022, boosting the country’s international reserves.
Fuel Subsidies Weaken Fiscal Balance: In January 2022, the government reversed a plan to phase out implicit fuel subsidies that support petroleum price controls. Due to the subsidies, the federal government’s budget for 2022 has been adjusted, with a deficit target that is 0.6 percent of GDP higher than the original target (with an additional equal hit to the other levels of government). Higher oil prices would also increase the cost of subsidies, reducing the budget’s benefit from higher global oil prices. We expect the general government fiscal deficit in 2022 to be roughly the same as it was in 2021, at 4.1 percent of GDP. However, we estimate that an increase of USD10 per barrel would reduce the fiscal deficit by 0.5 percent of GDP.
High Debt Servicing Costs: We anticipate that general government debt, including the Federal Government of Nigeria’s (FGN) overdraft with the Central Bank of Nigeria (CBN), will rise to 32 percent of GDP by the end of 2022, well below the current ‘B’ median forecast of 79.1 percent. Revenue-related debt affordability metrics are aided by an increase in non-oil revenue to an estimated 5.6 percent of GDP in 2021, up from an average of 3.9 percent in the previous five years. However, debt remained at 348 percent of revenue at the end of 2021, exceeding the current ‘B’ median of 325 percent. The debt-to-revenue ratio of the FGN is much higher, at over 755 percent. If oil prices remain above Fitch’s current assumptions, higher nominal GDP and oil revenue will almost certainly result in some improvement in the outlook.
GDP Growth Recovers: After a 1.8 percent contraction in 2020, real GDP growth recovered in 2021 to 3.4 percent. The non-oil sector, particularly agriculture and manufacturing, drove growth, which was aided by CBN interventions. Higher oil receipts will boost foreign-currency liquidity and support the non-oil sectors’ continued recovery, but oil production will remain below capacity. Fitch predicts that GDP growth will remain slightly above 3% in 2022 and 2023.
Problems with Operations Fitch expects crude oil production, including condensates, to remain at 1.7 million barrels per day in 2022, rising to 1.8 million in 2023.
The Dangote refinery, which will produce enough refined products to meet Nigeria’s domestic demand, will begin operations in the second half of 2022 and will reach full capacity in late 2023. This will help Nigeria’s external position and economic growth by lowering fuel imports and transportation costs.
High Inflation: Fitch expects annual average inflation to fall to 14.6 percent in 2022, from 17 percent in 2021, due to fuel subsidies shielding the country from global energy prices. Food prices, global commodity market disruptions, and supply constraints due to import restrictions will keep inflation well above the ‘B’ median of 4.6 percent. In order to support the economic recovery, the CBN has kept official policy rates unchanged since September 2020. We anticipate that the central bank will continue to manage domestic liquidity.
Governance: Nigeria has a ‘5’ ESG Relevance Score (RS) for Political Stability and Rights, as well as Rule of Law, Institutional and Regulatory Quality, and Corruption Control. These scores reflect the importance we place on the World Bank Governance Indicators (WBGI) in our proprietary SRM. Nigeria has a low WBGI ranking of 16.4, indicating a lack of institutional capacity, inconsistent application of the rule of law, and a high level of corruption.
