Paragraph 1: Fitch Upgrades Nigeria’s Sovereign Credit Rating
Fitch Ratings has elevated Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from ‘B-‘ to ‘B’ with a stable outlook. This upgrade signals increased confidence in the Nigerian government’s commitment to economic reforms initiated in June 2023. These reforms encompass a shift towards orthodox economic policies, including the liberalization of the exchange rate, tightening of monetary policy, measures to halt deficit monetization, and the removal of fuel subsidies. This positive assessment underscores Fitch’s belief that these policy changes will contribute to a more stable and functional foreign exchange market, paving the way for lower inflation and reduced external vulnerabilities.
Paragraph 2: Justification for the Upgrade: Commitment to Reform and Improved FX Market Dynamics
The rationale behind Fitch’s upgrade stems from the Nigerian government’s demonstrated commitment to policy reforms. The adoption of a more market-driven exchange rate mechanism, coupled with tighter monetary policy, is seen as crucial for enhancing foreign exchange market stability and attracting foreign investment. The removal of fuel subsidies, while politically challenging, addresses a long-standing fiscal burden, freeing up resources for other critical areas and promoting greater economic efficiency. These reforms, according to Fitch, position Nigeria for improved macroeconomic performance and reduced reliance on external financing.
Paragraph 3: Stable Outlook: Anticipating Sustained Reforms and Macroeconomic Improvement
The stable outlook assigned by Fitch reflects the expectation that the Nigerian government will maintain its commitment to these policy reforms. This sustained effort is anticipated to further improve the functioning of the foreign exchange market and support a downward trajectory for inflation, albeit at levels still higher than peer countries with similar ratings. Fitch acknowledges that inflation remains a challenge, but the reforms are expected to create a more conducive environment for price stability over the medium term. Furthermore, the outlook anticipates a reduction in external vulnerabilities as domestic foreign currency supply constraints ease and renewed energy sector reforms contribute to sustained current account surpluses.
Paragraph 4: Enhanced FX Market Transparency and Liquidity: A Key Driver of Stability
Fitch commends the increased transparency and liquidity in the Nigerian foreign exchange market. The Central Bank of Nigeria’s (CBN) introduction of an electronic foreign exchange matching platform and a new foreign exchange code aimed at enhancing transparency and efficiency has facilitated a substantial increase in foreign exchange liquidity and overall market stability. This is particularly significant following the 40% depreciation of the naira in 2024. These measures have played a vital role in narrowing the gap between the official and parallel exchange rates, promoting a more unified and efficient market.
Paragraph 5: Impact of US Tariffs and Oil Price Volatility: Assessing External Risks
While acknowledging the potential impact of the 14% US tariff imposed on Nigerian goods, Fitch expects the effect to be limited due to the exclusion of oil-related exports. Oil exports constitute a significant portion of Nigeria’s total exports to the US and contribute substantially to the country’s GDP. Consequently, the tariffs are not expected to significantly disrupt trade relations. Fitch identifies lower oil prices as a larger risk, potentially weakening external buffers and fiscal metrics, and posing a test to the newly implemented policy framework. However, the enhanced policy flexibility afforded by the reforms strengthens Nigeria’s ability to manage external shocks and navigate periods of price volatility.
Paragraph 6: Sustained Reforms Key for Long-Term Economic Performance
In conclusion, Fitch’s upgrade of Nigeria’s sovereign credit rating to ‘B’ with a stable outlook reflects a positive assessment of the ongoing economic reforms. The liberalization of the exchange rate, tighter monetary policy, and the removal of fuel subsidies are seen as key steps towards achieving greater macroeconomic stability and reducing external vulnerabilities. While challenges remain, particularly with regard to inflation and oil price volatility, Fitch expects the government’s continued commitment to reform to strengthen Nigeria’s resilience and pave the way for improved long-term economic performance. Maintaining these reforms and ensuring their effective implementation will be crucial for realizing the full potential of these positive developments.
