Nigeria Risks Another Recession As Fitch Downgrades Country's GDP Growth

 

The Global credit rating agency, Fitch Ratings, has downgraded its economic ratings for Nigeria, stating that Nigeria's economy will experience contraction within 2020, which will lead to a deficit in Nigeria's current account. Fitch's report on Nigeria comes a week after the International Monetary Fund (IMF) stated that Nigeria will record deeper contraction which means the country's economy will get worse this year.

Aside from the contraction and deficit, Fitch said foreign exchange reserves would fall to $23.3 billion by the end of 2020 from $38.6 billion in December 2019. According to Fitch, Nigeria's economy will contract by three per cent in 2020 and the current account will record a deficit equivalent to 3.8 per cent of Gross Domestic Product this year. AllNews had reported that the IMF Managing Director, Kristalina Georgieva, had stated that Nigeria's economy will experience a deeper contraction, moving from over +2% growth to -3.4%.

Why Fitch downgraded its economy projection

Fitch based the change on the oil production cut deal led by the Organisation of Petroleum Exporting Countries (OPEC), of which Nigeria is a member. The Minister of State for Petroleum Resources, Timipre Sylva, had stated that Nigeria is expected to cut production by 417,000 barrel per day (bpd) to 1.41 million bpd in May and June, in addition to condensate production of between 360,000 and 460,000 bpd.

Nigeria had decided to cut oil production following an agreement between OPEC and OPEC+ to cut output by 10 per cent, resulting into the cut of 9.7 million barrels per day in May and June. The agreement was sealed in April, last month, “We assume that Nigeria will comply fully with the production caps under the OPEC+ agreement, and have reduced our forecast oil output to 1.88 million bpd (including condensates) in 2020 and 1.87 million bpd in 2021, compared with our earlier forecast of 2.1 million bpd for both years.

“We have adjusted our GDP forecasts, and now expect Nigeria’s economy to contract by three per cent in 2020, before a recovery to three per cent growth in 2021.

“Despite the OPEC+ deal, our oil price forecasts remain unchanged at $35/barrel for Brent on average in 2020 and $45/barrel in 2021.”

Fitch disclosed that the decline in Nigeria's exports and remittance inflows would keep the current account in deficit, despite a sharp drop in imports, “We project the current account, which had been in surplus for much of the last 20 years, to record a deficit equivalent to 3.8 per cent of GDP in 2020 and 2.5 per cent in 2021,”

Drop in foreign-currency reserves reflect CBN handling

According to Fitch, despite limited depreciation in the naira’s key exchange rates, over the first four months of 2020, Nigeria's foreign-currency reserves had dropped by $5 billion. The credit rating agency stated that this is due to the handling of access to foreign currency by the Central bank of Nigeria (CBN).

"This reflects moves by the CBN to tighten foreign-currency access. This has contained capital outflows temporarily, although the build-up of pent-up foreign-currency demand may increase the risk of a disruptive future exchange-rate adjustment.

“We expect outflows to materialise later in the year, which, alongside a significant current-account deficit and continued CBN resistance to overhauling the exchange-rate framework, will drive a fall in international reserves from $38.6bn at end-2019 to $23.3bn at end-2020.”

The agency said outflows of foreign portfolio investment will mount pressure on external liquidity. it added that portfolio holdings of non-resident investors in Nigeria, which amounted to $34.3 billion at end-2019, would fall by 46 per cent in Q1 2020, according to IMF estimation. Fitch disclosed that this includes a $7 billion decline in foreign holdings of open-market operation bills issued by CBN.

It was learnt that the available funds will still be enough three months of current-account payments; this, Fitch stated was in line with the median for ‘B’ rated sovereigns. However, the foreign reserves will not be enough to defend against external vulnerabilities, at this level, reserves would offer little in the way of a buffer against external vulnerabilities, given large funding needs and an overvalued exchange rate,” Fitch added.

Nigeria needs suspension of debt service

According to Fitch, Nigeria is in need of the temporary suspension of bilateral debt service under the G20 initiative announced in April, but considering its only $165 million in bilateral debt service that will be due in May-December, the temporary suspension or relief will only do little to help Nigeria's situation.

AllNews had reported that IMF chief, Georgieva, had disclosed that IMF and the World Bank is leading the effort for a debt standstill, stating that if a country's economy is standstill - as it has been under lockdown due to COVID-19 - then debt servicing should also be paused.

Meanwhile, Fitch said more concessional multilateral loans would ease near-term liquidity pressures, but the risk of a disruptive macroeconomic adjustment would persist, “If secured, multilateral loans would cover around 21 per cent of the general government deficit in 2020, under our forecasts,” it added.