Nigeria’s Sovereign Credit Rating Upgraded by Fitch: A Testament to Reform and Resilience
Fitch Ratings has upgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘B’ from ‘B-‘, accompanied by a stable outlook. This positive reassessment underscores growing confidence in the Nigerian government’s commitment to economic reforms initiated in June 2023. These reforms, encompassing exchange rate liberalization, monetary policy tightening, and measures to halt deficit monetization and eliminate fuel subsidies, signal a shift towards orthodox economic principles. This decisive action has instilled optimism regarding Nigeria’s macroeconomic trajectory and its ability to navigate challenges.
The stable outlook accompanying the upgrade reflects Fitch’s anticipation that the current macroeconomic policy stance will further enhance the functioning of the foreign exchange (FX) market, contributing to a decline in inflation, although rates are projected to remain above those of peer nations. Fitch also foresees a continued reduction in external vulnerabilities due to the easing of domestic foreign currency supply constraints. Renewed reforms in the energy sector are expected to sustain current account surpluses, bolstering Nigeria’s external position.
Fitch acknowledges the positive impact of increased transparency in the FX market, facilitated by the Central Bank of Nigeria’s (CBN) introduction of an electronic FX matching platform and a novel FX code. These measures aim to enhance transparency and efficiency in FX transactions. Coupled with monetary policy tightening, these initiatives have contributed to a surge in FX liquidity and overall stability in the FX market following a 40% depreciation in 2024. This has effectively narrowed the gap between official and parallel exchange rates.
The upgrade is further supported by the significant increase in net official FX inflows through the CBN and autonomous sources during the fourth quarter of 2024, registering an 89% rise compared to an 8% increase in the same period of 2023. Fitch anticipates that the ongoing formalization of FX activity will provide support to the exchange rate, although a modest depreciation is projected in the near term. This suggests a cautiously optimistic outlook for the naira’s performance.
Furthermore, Fitch downplays the potential impact of the 14% US tariff imposed on Nigerian imports. The rating agency expects the effect to be limited due to the exclusion of oil-related exports, which constitute a substantial portion of Nigeria’s total exports to the US. Oil exports accounted for approximately 92% of total exports to the US in 2023, representing nearly 2% of Nigeria’s GDP. Fitch identifies lower oil prices as a more significant risk, potentially weakening external buffers and fiscal metrics, thereby testing the resilience of the new policy framework. However, the enhanced policy flexibility afforded by the reforms strengthens Nigeria’s capacity to absorb and respond to such external shocks.
In conclusion, Fitch’s upgrade of Nigeria’s sovereign credit rating reflects a positive assessment of the government’s commitment to economic reform and the resulting improvements in macroeconomic stability. The ongoing reforms, particularly in the FX market and the monetary policy sphere, have instilled confidence in Nigeria’s ability to address long-standing economic challenges. While acknowledging potential risks, such as fluctuations in oil prices, Fitch’s stable outlook suggests a cautiously optimistic view of Nigeria’s economic prospects, reinforced by the country’s increased policy flexibility and resilience in the face of external pressures. The upgrade signals a vote of confidence in Nigeria’s economic trajectory and its ability to navigate a complex global economic landscape.
