Fitch lifts Nigeria’s outlook to ‘Stable,’ but reform gains face external tests

Fitch Ratings has revised Nigeria’s credit outlook to Stable from Negative, in a signal that confidence in the Tinubu administration’s economic reform drive is gradually firming.

Though the long-term foreign currency issuer default rating (IDR) remains unchanged at ‘B’—a speculative grade reflecting high credit risk, analysts say the shift reflects growing optimism about Nigeria’s macroeconomic trajectory.

The outlook change, published on April 9, comes against a backdrop of intensifying global risks, including new U.S. trade barriers and tumbling oil prices that threaten to destabilize the country’s external balance.

But for now, the reforms introduced since mid-2023—chiefly exchange rate liberalization, monetary tightening, fuel subsidy removal, and the halting of central bank deficit financing—are beginning to reflect in key indicators.

“We are seeing clear signs of increased commitment to market-based reforms under President Tinubu’s administration,” Fitch wrote. “While challenges remain, Nigeria’s trajectory has shifted toward stability and greater investor confidence.”

The comment stands in contrast to Fitch’s 2022 and 2023 warnings, when growing fiscal indiscipline, monetized deficits, and weak governance prompted a negative rating bias.

FX Reform Shows Early Wins—but Fragility Persists

Central to Nigeria’s recent progress is its foreign exchange reform, which gathered pace last year when the Central Bank of Nigeria (CBN) collapsed the multiple exchange rate windows into a unified market. The introduction of an FX matching platform and code of conduct for participants in 2024 was viewed as a major step toward restoring market confidence.

The naira depreciated by over 40% during the unification, but this paved the way for greater liquidity and transparency. FX inflows surged by 89% in Q4 2024, Fitch said, compared to a modest 8% rise a year earlier.

Still, these gains remain precarious. In recent weeks, Brent crude slipped below $60, a level close to Nigeria’s estimated fiscal breakeven. At the same time, Washington slapped a 14% tariff on Nigerian exports, a move seen as politically motivated amid Donald Trump’s re-emergence on the global stage.

These developments, compounded by investor jitters flagged by J.P. Morgan earlier this week, have rekindled concerns about Nigeria’s ability to sustain FX stability in the face of external shocks.

The Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) warned the new tariffs could “erode non-oil FX earnings just as the country was beginning to rebuild confidence.” J.P. Morgan also forecasted that dollar scarcity could return if oil prices stay low and capital outflows escalate.

Inflation Eases, But Far From Comfortable

Inflation, a longstanding concern, slowed slightly to 23.2% in February 2025, according to the rebased Consumer Price Index (CPI). This marks progress, but inflation still dwarfs the 4.3% median for ‘B’-rated peers. The CBN’s Monetary Policy Committee has responded with nine consecutive rate hikes since early 2024, pushing the policy rate to 27.5%—its highest level on record.

Fitch expects inflation to average 22% in 2025 and decline slightly to 20% in 2026. While it noted the monetary response as appropriate, it warned against loosening prematurely, especially as supply-side bottlenecks and food insecurity remain rampant.

Buffers Improve, But External Position Still Vulnerable

Gross external reserves rose to $41 billion by December 2024, buoyed by improved FX flows and reduced import bills. But they have since declined to $38 billion following a $1.1 billion Eurobond repayment, highlighting the volatility in Nigeria’s buffers.

The country’s net external reserves stand at around $23 billion, a level the CBN says is “comfortable” but still vulnerable to shocks. Fitch acknowledged the regulator’s efforts to reduce reliance on FX swaps, with such liabilities now representing only 14% of reserves, down from 25% late last year.

A key cushion may come from the Dangote Refinery, which Fitch projects will scale up to 650,000 barrels per day (bpd) by mid-2025 from the current 550,000 bpd. The facility is expected to significantly reduce Nigeria’s fuel imports, which currently account for nearly a third of total goods imports.

Oil production, excluding condensates, is expected to tick up to 1.43 million bpd this year—still well below the 1.8 million bpd seen before 2019, due to persistent pipeline sabotage, underinvestment, and regulatory hurdles.

Fiscal Pressures, Fragile Banks Still Weigh on Outlook

Even as FX inflows improve and inflation shows early signs of cooling, fiscal vulnerabilities continue to dog the economy. Fitch forecasts that the general government deficit will remain wide, averaging 4.2% of GDP in 2025 and 2026.

The reasons are familiar: ballooning wage bills, debt servicing, and pre-election spending that has yet to be unwound. Interest-to-revenue ratios, an indicator of fiscal stress, remain elevated at about 30% across all government levels, and close to 50% at the federal tier.

Fitch also flagged growing risks in the banking sector. Non-performing loans stood at 4.9% in November 2024 and are expected to rise as inflation and interest rates squeeze household and corporate balance sheets. Smaller lenders, in particular, may struggle to meet the new capital thresholds announced by the CBN, raising the likelihood of mergers and acquisitions in the sector.

“While the banking system is not in immediate danger, asset quality is deteriorating, and system-wide vulnerabilities could be exacerbated by external shocks,” the agency said.

Governance Still a Weak Spot

Despite the reforms, Nigeria’s institutional indicators remain among the lowest in the world. The country is ranked in the 19th percentile in the World Bank’s Governance Indicators, reflecting widespread concerns about corruption, judicial weakness, and poor regulatory enforcement.

Fitch cautioned that without significant improvement in governance, investor confidence could stall, limiting the long-term benefits of current reforms.

The improved outlook from Fitch marks a rare dose of good news for Nigeria in a year already fraught with global headwinds. It offers some vindication for President Tinubu’s policy agenda, which had come under fire from labor unions and opposition politicians for causing short-term pain.

But as oil prices slide and global trade barriers resurface, Nigeria’s recovery path remains exposed. The balance of risk still leans heavily on volatile external factors, underscoring the importance of deepening domestic revenue sources and entrenching reforms.

With J.P. Morgan already sounding alarms over investor flight, and the naira again under pressure, analysts believe the government will need more than policy tweaks—it must deliver trust.