Reuters on Thursday reported that Nigeria’s ratings were supported by its large and diversified economy, significant oil reserves, its net external creditor position, low external debt service ratio and large domestic debt market.
These are balanced against relatively low per capita Gross Domestic Product, an exceptionally narrow fiscal revenue base and a weak business environment. The negative outlook, according to the report, reflects the downside risks from rising government indebtedness, and the possibility of a reversal of recent improvements in foreign currency liquidity and a faltering of the still fragile economic recovery.
Fitch forecasts growth of 1.5 per cent in 2017 and 2.6 per cent in 2018, following Nigeria’s first contraction in 25 years in 2016.
The GDP growth continued to contract in 1Q17, but by less than in the previous four quarters, it noted.
It also said the recovery would be driven mainly by increased FX availability to the non-oil economy and fiscal stimulus, as higher oil revenue and various funding initiatives had raised the government’s ability to execute on capital spending plans.
However, the FX market remained far from fully transparent, domestic liquidity had also become a constraint, and the growth forecast was subject to downside risks, it added.
It stated that inflation remained high at 16.1 per cent in July 2017, but Fitch projected it would decline to 11 per cent in 2019.
Crude oil production rose to 1.8 million barrels per day in July 2017, from 1.5mbpd in December 2016; the increase was driven by the lifting of force majeure at the Forcados export terminal and the completion of maintenance at both Forcados and the Bonga oil field.
Fitch has revised down its expectation of full-year average production to 1.8 mbpd, which is about equal to 2016 production.
Separately, Fitch noted that the imposition of an OPEC quota might cap Nigeria’s crude production at 1.8mbpd, which could limit the oil sector’s upside potential.
However, as it excludes condensate production, the quota should not affect Nigeria’s near-term production potential.
In April 2017, the Central Bank of Nigeria introduced the Investors & Exporters currency window and gradually introduced further measures to improve the liquidity of this instrument.
It also intervenes actively to support the currency while keeping domestic liquidity conditions tight. In addition, higher oil prices and increased portfolio and the FDI inflows have enabled the CBN to increase its provision of the FX liquidity to the market.
As a result, the parallel exchange rate began to converge towards the I&E rate, currently at around N360 per US dollar, and foreign currency liquidity shortages eased.