This was disclosed by the Director, of Sovereigns, at Fitch Ratings, Gaimin Nonyane, during a post-sovereign rating webinar on Tuesday focused on Nigeria and Egypt.
Earlier in May, Fitch Ratings revised the Outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to Positive from Stable, and affirmed the IDR at ‘B-’, on the back of reforms in the foreign exchange market, oil industry, and monetary policy over the past one year.
Speaking on the fate of the Naira which has struggled since it’s floating in June 2023, Nonyane said, “The Naira is still finding its feet. It is still in price discovery mode. So we would expect a lot of volatility in the near term. However, as I just mentioned, there is the expectation of multilateral donor funding coming in Q3 this year in addition to improved oil receipts. So that should help to reduce volatility somewhat by Q3 this year.
“We project that will average about 1200/dollar this year and end the year round 1450/dollar. And in terms of next year, we see a gradual depreciation but it also depends largely on the foreign exchange reforms momentum. So, this is our baseline scenario on the basis that the momentum continues at the current pace.”
On the likelihood of Nigeria being upgraded further, Nonyane said “Currently, we see a path to a sustainable recovery in CBN foreign exchange position. And sustained current account surpluses. Currently, the current account surplus is low, below one percent of the GDP, although they are experiencing some surpluses, it is still not significant in addition to that, if we see a sustained reduction in inflation and greater stability in the foreign exchange markets, and one key factor is the tax revenue. We need to see stronger mobilization of domestic non-oil revenue. So all of these combined collectively, it’s not one or the other, which could potentially lead to an upgrade.
“Low tax revenue base has contributed to the government’s very high interest-to-revenue ratio which currently stands at 38 percent and that is quite high. This is about four times more of the B rating median and forms a key rating consideration.”
Fitch Ratings, however, projected recovery in the oil sector.
“However, we do expect a recovery in the oil sector to support the current account over the short term. We also expect the oil refining capacity to increase over the short term as the Dangote plant ramps up capacity. We expect the PMS to come on stream later this year or early next year and this would help to reduce transport costs and lower refined oil imports which should help to ease foreign exchange demands,” the director at Fitch Ratings said.
Delving into the foreign reserves of Nigeria, Nonyane said that the gross foreign exchange reserves have fallen from its peak in March at about $34bn and it is currently standing around $32.7bn with recent gains from oil receipts eroded by repayment of existing debt obligations as the Central Bank of Nigeria repaid draw down on foreign exchange swaps and foreign exchange sales to Bureau De Change to support the Naira.
“In terms of the outlook, we project foreign exchange reserves to rise modestly by year-end and this would be as a result of a recovery in oil receipts, multilateral funding, and potentially commercial borrowing. This would equate to about 4.2 months of current external payments which is still in line with our B-medium but following the CBN’s recent publication of its financial statement, we still estimate that more than 30 percent of the gross reserves are from bank swaps, this highlights an external risk. Although we do expect the majority of the swaps to continue to be rolled over, providing space to navigate some challenges in external debt servicing.
“External debt servicing is expected to rise by about $4.8bn in 2024 and a further $5.2bn in 2025 and this includes amortization and the $1.1bn Eurobond which would be due in November 2025. So sustaining the foreign exchange momentum is key,” she concluded.
On multilateral funding, the Minister of Finance and Coordinating Minister of the Economy, Wale Edun, while appearing on Sunday Politics, a program on Channels Television, mentioned the expected funding coming from the World Bank in a matter of weeks.
“In two weeks, the board of the World Bank will consider a $2.25bn package for Nigeria, of like virtually free or almost grant funding, very low interest in funding. It is not being given on conditionalities. A large part of it,$1.5bn is what they call Development Policy Operation. Essentially, it is in recognition of what has been done to stabilize the Nigerian economy and get it back on the growth path and the funding will come virtually immediately. At least, half of it will come virtually immediately after that board meeting. That’s what we are looking forward to.
“That is why we are confident we will achieve and it just shows that we know how to use the multilateral development banks to our advantage. We don’t agree with everything they say. We don’t have to agree but they agree with our homegrown policies for trying to get Nigeria moving again,” he said.
