Rating Action Commentary
ֳ Upgrades Nigeria to 'B'; Outlook Stable
Fri 11 Apr, 2025 - 5:01 PM ET
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Nigeria - Rating Action Report
ֳ - London - 11 Apr 2025: ֳ Ratings has upgraded Nigeria's Long-Term (LT) Foreign-Currency (FC) Issuer Default Rating (IDR) to 'B', from 'B-'. The Outlook is Stable.
A full list of rating actions is at the end of this rating action commentary.
Key Rating Drivers
High
Rating Upgraded, Stable Outlook: The upgrade reflects increased confidence in the government's broad commitment to policy reforms implemented since its move to orthodox economic policies in June 2023, including exchange rate liberalisation, monetary policy tightening and steps to end deficit monetisation and remove fuel subsidies. These have improved policy coherence and credibility and reduced economic distortions and near-term risks to macroeconomic stability, enhancing resilience in the context of persistent domestic challenges and heightened external risks.
The Stable Outlook reflects ֳ's expectation that the macroeconomic policy stance will sustain improvements in the functioning of the FX market and support the move to lower inflation, although it will likely remain far higher than rating peers. Additionally, we anticipate a continued reduction in external vulnerabilities through further easing of domestic FC supply constraints, while renewed energy sector reforms should help sustain current account surpluses.
Exchange Rate Reforms, Higher Inflows: Greater formalisation of FX activity including the Central Bank of Nigeria's (CBN) recent introduction of an electronic FX matching platform and a new FX code to enhance transparency and efficiency, along with monetary policy tightening, has led to a greater rise in FX liquidity and general stability in the FX market after a 40% depreciation in 2024, closing the spread between the official and parallel exchange rates. Net official FX inflows through the CBN and autonomous sources rose by about 89% in 4Q24, compared to an 8% rise in 4Q23. We expect continued formalisation of FX activity to support the exchange rate, although we anticipate modest depreciation in the short term.
Tighter Monetary Conditions, Anchoring Rates: The CBN has tightened monetary conditions through a combination of policy rate hikes to 27.5% (up 875bp since February 2024) and use of prudential and operational tools such as open market operations (at rates closely aligned to the MPR) to strengthen monetary policy transmission after years of financial repression. We project inflation, which reached 23.2% year-on-year in February 2025 under the recently rebased CPI, to average 22% in 2025 ('B' median 4.3%) and 20% in 2026. ֳ does not anticipate a premature easing of monetary policy that would undermine the benign effects of the policy adjustment, given high inflation.
Medium
External Buffers Above Peers: External buffers have benefitted from the policy reforms and associated increase in formalised FX transactions. Gross official reserves rose to USD41 billion at end-2024, from a low of USD32 billion in mid-2024, but have since dropped to USD38 billion (covering about five months of current external payments; CXP) due mainly to higher debt service payments. We project the current account surplus, estimated at 6.6% of GDP in 2024, to average 3.3% of GDP in 2025-2026. Together with modest capital inflows, this underpins our forecast for FX reserves to average 5.0 months of CXP, exceeding the 'B' median of 4.4 months.
Reduced FX Liabilities: There is a lack of detail on the composition of reserves amid recent indications by the central bank that place net reserves at USD23 billion at end-2024, up from about USD4 billion at end-2023. Nonetheless, we estimate that roughly 14% of gross reserves comprise FX swaps with local banks, down from 25% in our November 2024 assessment, amid increased efforts by the CBN to reduce FX liabilities.
Improving Refining Capacity: ֳ expects Nigeria's oil refining capacity to increase in 2025 as the Dangote refinery scales up operations to reach 0.65 mbpd capacity by end-2Q25 from 0.55 mbpd currently. The refinery is operating at 85% of capacity and meets daily domestic consumption estimated at 50 million litres, helping to reduce oil-related import costs accounting for about 30% of goods imports. However, the refinery continues to rely on foreign markets for a portion of its crude oil due to Nigeria's limited production capacity.
Modest Crude Oil Production Recovery: We expect crude oil production (excluding condensates) to increase in 2025-2026, averaging 1.43 mbpd, from 1.34 mbpd in 2024, helped by improved onshore surveillance and increased investments by local oil companies. However, underinvestment and production outages persist, constraining production below 2019 levels.
Nigeria's 'B' IDRs also reflect the following key rating drivers:
US Tariffs: ֳ expects the impact of US tariffs on Nigeria's trade position with the US to be limited, amid the exclusion of oil-related exports, which accounted for about 92% of total exports (nearly 2% of GDP) to the US in 2023. Lower oil prices pose a bigger risk as they would weaken external buffers and fiscal metrics and test the new policy framework. Nevertheless, greater policy flexibility enhances Nigeria's ability to deal with shocks.
Wider Deficits: ֳ forecasts the budget deficit will widen in 2025-2026, averaging 4.2% of GDP, even as revenue increases. Expenditure will be driven by higher wages, social and security expenses, debt servicing costs and election-related expenses ahead of the 2027 elections. General government (GG) revenue will be bolstered by non-oil tax revenue reforms although political challenges and high implementation risks may hinder progress.
High Interest Expenditure: We expect GG revenue/GDP to rise, but to remain structurally low (averaging 13.3% in 2025-2026), largely accounting for a high GG interest/revenue ratio, above 30% ('B' median 13.2%), with Federal government (FG) interest/FG revenue ratio, nearly 50%. Banks' ample liquidity and strong demand for government securities should support domestic financing capacity.
Moderate Debt, External Debt Service: We expect GG debt/GDP to decline marginally in 2025-2026, to 51%, in line with our 'B' median due to strong nominal GDP growth. Nigeria's public debt has a fairly long average maturity of 10.9 years, and over half is local-currency denominated ('B' median of 37%). Government external debt service is moderate but expected to rise to USD5.2 billion in 2025 (with USD4.5 billion of amortisations, including a USD1.1 billion Eurobond repayment due in November 2025), from USD4.7 billion in 2024, and fall to USD3.5 billion in 2026. There was a minor delay in paying a coupon due on 28 March 2025 on the sovereign's USD4 billion Eurobond, highlighting public finance management challenges.
Banking Sector Challenges: We expect the non-performing loans ratio (end-November 2024: 4.9%) to rise in 2025 on high inflation and interest rates. Stage 2 loans are high in some banks and the expected lifting of forbearance measures on loan classification could further increase impaired loans. However, loan books are small (35% of total assets), limiting the impact on banks' performance. Significant progress has been made in raising capital to achieve compliance with higher minimum paid-in capital requirements by end-1Q26, although increased M&A activity is still likely among third-tier banks. The windfall tax on realised gains on FX transactions announced in 2024 appears to be much less significant than we initially feared and will be absorbed by strong profitability.
ESG - Governance: Nigeria has an ESG Relevance Score (RS) of '5' for Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Nigeria has a low WBGI ranking, at the 19th percentile, reflecting weak institutional capacity, uneven application of the rule of law and a high level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Macro: A deterioration in the credibility and consistency of monetary and fiscal policymaking and FX management, resulting in renewed inflationary pressures and greater distortions in the FX market.
- External Finances: Renewed external liquidity stress, for example, due to lower oil prices and more constrained external financing sources.
- Public Finances: Higher risk of debt servicing difficulties, for example, stemming from a widening fiscal deficit, failure to put the interest/revenue ratio on a downward path, weaker demand for domestic government debt and the inability to access Eurobond financing.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Macro: Sustained progress in disinflation and stronger medium-term growth prospects that result in a significant increase in GDP per capita, for example, following continued implementation of reforms, and improved governance.
- External Finances: A further building of external buffers, for example, due to persistent improvement in the level and composition of FX liquidity buffers, complete relaxation of domestic FC supply constraints and sustained current account surpluses.
- Public Finances: Sustainable improvement in public finances, potentially arising from an increase in oil revenue and stronger mobilisation of domestic non-oil revenue.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
ֳ's proprietary SRM assigns Nigeria a score equivalent to a rating of 'CCC+' on the LT FC IDR scale.
ֳ's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
- Macro: +2 notches: ֳ has added +1 notch on Macro to adjust for the exchange rate adjustment that has negatively affected the SRM, although we assess that it does not signify a weaker macroeconomic policy environment. This is in addition to a +1 notch to reflect our confidence in the government's broad commitment to implementing reforms that improve policy coherence and credibility and reduce economic distortions and near-term risks to macroeconomic stability, even as significant challenges remain.
ֳ's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ֳ's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Country Ceiling
The Country Ceiling for Nigeria is 'B', in line with the LT FC IDR. This reflects no material constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
ֳ's Country Ceiling Model produced a starting point uplift of 0 notches above the IDR. Our rating committee did not apply a qualitative adjustment to the model result.
Summary of Data Adjustments
Data that have been adjusted materially from those reported by the sovereign authorities must be disclosed (in bullet points). Leave blank if there is no such data.
Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The principal sources of information used in the analysis are described in the Applicable Criteria.
Nigeria does not publish consolidated fiscal data on a general government basis, which complicates our assessment of fiscal performance. ֳ is able to produce its own estimates for general government fiscal metrics based on disaggregated data on federal, state and local government revenue, spending and debt published by the NNPC, the CBN, the Debt Management Office, the Budget Office of the Federation and the National Bureau of Statistics. ֳ's estimates are broadly consistent with and comparable to the data used for other sovereigns. The data used was deemed sufficient for ֳ's rating purposes because we expect that the margin of error related to the estimates would not be material to the rating analysis.
ESG Considerations
Nigeria has an ESG Relevance Score of '4' for Political Stability and Rights as WBGI have the highest weight in ֳ's SRM and are, therefore, highly relevant to the rating and a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Nigeria has an ESG Relevance Score of '5'for Rule of Law, Institutional and Regulatory Quality and Control of Corruption as WBGI have the highest weight in ֳ's SRM and are, therefore, highly relevant to the rating and are a key rating driver with a high weight. As Nigeria has a percentile rank below 50 for the respective governance indicators, this has a negative impact on the credit profile.
Nigeria has an ESG Relevance Score of '4' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Nigeria has a percentile rank below 50 for the respective governance indicator, this has a negative impact on the credit profile.
Nigeria has an ESG Relevance Score of '4' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Nigeria, as for all sovereigns. As Nigeria has a fairly recent restructuring of public debt in 2005, this has a negative impact on the credit profile.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Country Ceiling Model, v2.0.3 (1)
- Debt Dynamics Model, v1.3.2 (1)
- Macro-Prudential Indicator Model, v1.5.0 (1)
- Sovereign Rating Model, v3.14.2 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Nigeria | UK Issued, EU Endorsed |