Fitch Ratings, a leading global credit ratings agency, recently released its credit outlook for Nigeria, signaling a positive shift in the country’s sovereign credit default outlook from stable to positive. 

This positive outlook is attributed to recent reforms implemented in Nigeria’s monetary policy and oil and gas sector, which have garnered confidence from international observers.

One significant aspect highlighted in the report is the expectation of further increases in monetary policy rates by the Central Bank of Nigeria (CBN) in the second half of the year. This projection comes on the heels of the CBN’s proactive approach to monetary policy adjustments, including a substantial 600 basis points hike in the Monetary Policy Rate (MPR) to 24.75% since February 2024. 

The CBN’s recent actions indicate a commitment to strengthening monetary policy transmission, particularly evident in the resumption of open market operations at rates closely aligned with the MPR.

Furthermore, Fitch projects a moderation in inflation rates, which have been a major target of the MPR hikes by the CBN. Despite inflation rising to 33.2% year-on-year in March, driven partly by exchange rate pass-through and escalating food prices, Fitch anticipates inflation to average 26.3% in 2024 and further decline to 18.2% in 2025. These projections, while still above the projected ‘B‘ median of 4.5%, indicate a positive trajectory if monetary policy measures continue to be effective.

“Fitch anticipates further increases in the CBN monetary policy rate in 2H24 (following the 600bp hike to 24.75% since February 2024 alongside tightening of reserve requirements) and strengthening of monetary policy transmission, after the recent resumption of open market operations at rates closely aligned to the MPR.

“We project inflation, which rose to 33.2% yoy in March due partly to exchange rate pass-through and rising food prices, to average 26.3% in 2024 and 18.2% in 2025, still well above our projected ‘B’ median of 4.5%,” it said.

The projection follows recent efforts by the CBN to tame inflation through a series of monetary policy adjustments. Despite consecutive hikes in the MPR, inflation has remained stubbornly high, rising from 90% in January to 33.2% in March 2024, with food inflation reaching 40.01% in the same period. These challenges underline the urgency of the CBN’s measures to stabilize prices and restore confidence in the economy.

The report also highlights increased investor appetite for federal government and CBN securities, driven by rising yields exceeding 20% following the MPR hikes. The upcoming MPC meeting scheduled for May 20th and 21st, 2024, presents an opportunity for the CBN to reassess prevailing economic conditions and determine the appropriate course of action regarding monetary policy adjustments.

While Fitch’s credit outlook for Nigeria reflects cautious optimism, it acknowledges the effectiveness of recent reforms while recognizing ongoing challenges to mitigate inflation and foster economic stability.

About 30% of Nigeria’s external reserves consist of FX bank swaps

The recent analysis by Fitch Ratings also sheds light on Nigeria’s foreign exchange (FX) reserves, revealing crucial insights into the composition and management of these reserves. The agency estimates that approximately 30% of Nigeria’s external reserves consist of foreign exchange bank swaps, highlighting a significant portion of reserves tied up in these financial instruments.

This revelation underscores ongoing uncertainties surrounding Nigeria’s net FX reserves, compounded by opaque entries totaling nearly $32 billion in FX forwards, over-the-counter futures, and currency swaps. 

These off-balance sheet commitments, as reported in the Central Bank of Nigeria’s (CBN) consolidated financial statement for 2022, contribute to the lack of clarity over the precise size and composition of Nigeria’s FX reserves, posing challenges to the nation’s sovereign credit profile.

Despite these concerns, Fitch anticipates that most of the FX bank swaps will continue to be rolled over, providing some temporary stability in reserves’ management. However, the lack of transparency surrounding these financial instruments remains a significant constraint on Nigeria’s economic stability and creditworthiness.

Further insights from the report highlight a recent upswing in non-resident inflows into Nigeria, driven by increased formalization of FX activities and tighter monetary policy measures. This influx of foreign capital has contributed to a notable appreciation of the Naira at the official FX window, following a substantial 71% depreciation observed from June 2023 through mid-March 2024.

Despite this recovery, Fitch warns that the exchange rate remains volatile, posing risks to economic stability. The agency also notes a decline in Nigeria’s gross FX reserves from $34.4 billion in mid-March to $32.2 billion by the end of April. This reduction partly reflects debt repayments and FX sales to Bureau de Change operators aimed at bolstering the currency.

“Gross FX reserves fell to USD32.2 billion at end-April, from a peak of USD34.4 billion in mid-March, partly reflecting repayment of existing debt obligations, and FX sales to BDCs to support the currency,” it said.

However, Fitch projects a steady current account surplus averaging 0.5% of Gross Domestic Product (GDP) for 2024-2025, supported by modest increases in oil production and remittances. It also forecasts a further decline in FX reserves, which are projected to cover just 4.2 months of current external payments by the end of 2024, aligning with the ‘B’ median.

“Fitch projects a broadly flat current account surplus, averaging 0.5% of GDP in 2024-2025, supported by a modest rise in oil production and remittances.

“We forecast FX reserves to fall to 4.2 months of current external payments at end-2024 (‘B’ median 4.2), from 4.4 months at end-2023,” it said.