Fitch Ratings has upgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Kaduna, Kogi, Lagos, and Oyo states from ‘B-’ to ‘B’. According to information on the agency’s website, the outlook for all four states remains Stable.
The upgrade follows the recent elevation of Nigeria’s sovereign rating to ‘B’ from ‘B-’ on April 11, 2025, driven by improved macroeconomic stability and ongoing policy reforms. Fitch explained that given the predominant role of the federal government in Nigeria’s fiscal arrangements, including an equalization mechanism that disburses transfers to states, the sovereign rating action has been mirrored in the ratings of the affected states.
“We consider the federal government’s role is predominant in intergovernmental relations, as it controls the equalization mechanism enacted through a system of transfers to states. Therefore, the upgrade of sovereign IDRs is mirrored in the upgrade of those of Kaduna, Kogi, Lagos, and Oyo, as their Standalone Credit Profiles (SCPs) align with or are above the ratings of Nigeria,” Fitch stated.
Key Drivers Behind the Upgrade
Fitch’s latest projections for the states incorporated several factors, including a steeper depreciation of the naira, which is expected to exceed N1,500 to the US dollar between 2024 and 2028, and the persistence of high, but gradually declining, inflation levels.
The agency also noted an increase of over 20 percent in federal Value Added Tax (VAT) and oil-related transfers to states in 2024, providing a cushion for their financial positions. However, Fitch cautioned that the weakness of the naira intensifies debt servicing risks, particularly for states with significant external debt exposure.
State-by-State Analysis
Kaduna State (‘bb’):
Kaduna remains heavily exposed to currency risk, with 86 percent of its direct debt denominated in foreign currencies as of the end of 2023. Fitch projects the state’s payback ratio, an indicator of debt servicing ability, to stay around 18 times, reflecting weak coverage and a high debt-to-revenue ratio. Nonetheless, Kaduna benefits from strong operating margins of approximately 40 percent, supported by steady growth in internally generated revenue (IGR) and increased federal allocations.
Kogi State (‘bb’):
Kogi’s debt profile consists of both domestic and external borrowings, which have been channeled mainly into ambitious capital expenditure projects. The state’s payback ratio is expected to remain around 20 times over the medium term, pointing to sustained pressure on its ability to service debt. Fitch highlighted Kogi’s heavy reliance on oil-related federal transfers, which subjects its fiscal performance to high volatility linked to global oil price swings.
Lagos State (‘aa’):
Lagos, Nigeria’s economic powerhouse, holds 50 percent of its direct debt in foreign currencies. Nevertheless, Fitch projects the state’s payback ratio to remain strong at around 5 times by 2028. Lagos’s fiscal resilience is largely credited to its exceptional internally generated revenue, which accounts for 75 percent of its total operating revenue — far surpassing the national average of 25 percent. The state is also projected to achieve a budget surplus in 2024, further solidifying its financial position.
Importantly, Lagos retained its position as the state with the highest domestic debt stock, with the latest subnational debt report by the Debt Management Office (DMO) showing a domestic debt burden of N853.43 billion as of September 30, 2024. This figure represents over 20 percent of the total subnational domestic debt, which stood at N4.21 trillion across the 36 states and the Federal Capital Territory.
This substantial debt load underscores Lagos’s unique status as Nigeria’s commercial nerve center, where the demands for large-scale infrastructure investments continue to drive borrowing needs. However, Lagos’s robust revenue base has kept its debt sustainability within manageable bounds. In 2023, Lagos State generated N815.86 billion in IGR — a figure that eclipsed the combined IGR of 29 other states, which totaled N756.8 billion. Lagos also led in Pay-As-You-Earn (PAYE) collections, raking in N444.7 billion. This consistent revenue performance has enhanced the state’s creditworthiness and is believed to have influenced Fitch’s favorable rating for Lagos.
Oyo State (‘a’):
Oyo’s debt portfolio is predominantly denominated in local currency, shielding the state from foreign exchange risks. Fitch expects Oyo’s payback ratio to stay below 9 times, aided by increased federal transfers. However, the agency flagged volatility concerns due to the state’s heavy reliance on oil-related revenues and relatively weaker secondary fiscal metrics.
Lagos State’s Standalone Credit Profile (SCP) was assessed at ‘b+’, reflecting a combination of a ‘Vulnerable’ risk profile and financial metrics at the high end of the ‘aa’ category. Nevertheless, its IDRs are capped by Nigeria’s sovereign rating. Kaduna, Kogi, and Oyo states each maintain ‘b’ SCPs, combining vulnerable risk profiles with financial metrics positioned between the ‘a’ and ‘bb’ categories.
Environmental, Social, and Governance (ESG) Risks
Fitch assigned Kaduna, Kogi, and Oyo states an ESG Relevance Score of 4 for Biodiversity and Natural Resource Management, reflecting their reliance on oil revenues to sustain financial operations.
Kaduna faces additional ESG-related challenges, which include:
- Energy Management: Inefficient energy use and a high dependence on the national grid.
- Human Rights and Political Freedoms: Ethnic conflicts continue to impact civil rights negatively.
- Human Development: The state’s Human Development Index remains below the national average.
- Population and Demographics: Kaduna records below-average socio-economic indicators and a high proportion of residents living below the poverty line.
These ESG-related challenges are expected to remain headwinds to Kaduna’s overall development, even as fiscal reforms continue to unfold across the broader Nigerian economy.
