Nigeria’s Fitch Rating: There is at least water in the glass…
Several years ago, after the financial crisis was finally abating, if someone had told me that the rating agencies would be alive and well over a decade later, I would have taken the opposite side of that bet. They came under an incredible amount of criticism for the role they played in handing high quality ratings to financial instruments that exploded at the first sign of stress.
Here we are in 2023 and the ratings agencies have survived the worst with the Big Three— Moody’s, Standard & Poor’s, Fitch — still the Big Three. It turns out that no matter how bad the ratings are, it is still better than having no ratings at all i.e. flying blind with financial instruments is not an option.
But I digress. Fitch recently released their latest rating Issuer Default Rating (IDR) on Nigeria and maintained it at B- i.e. no change from the previous rating. As Nigeria has borrowed a fair amount in foreign currency over the last 8 years, anyone who has either lent to the country or is planning to, needs to know the risk that Nigeria will not be able to pay back what it borrowed. A rating of B- essentially tells us that the risk of lending dollars to Nigeria is definitely not zero. But what then is the risk?
Fitch’s proprietary SRM assigns Nigeria a score equivalent to a rating of ‘B-’ on the Long-Term Foreign- Currency IDR scale.
Our sovereign rating committee did not adjust the output from the SRM to arrive at the final Long- Term Foreign-Currency IDR.
Fitch’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 Long-Term Foreign-Currency IDR. Fitch’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.
That’s jargon to say that sometimes when their computer model spits out a rating, their rating committee made up of actual human beings can intervene to adjust the output when they feel like some factors could not be included properly in the model.
In this case they didn’t feel the need to make any adjustments and just went with what the model said. That is interesting given that a change in government is less than 2 weeks away. A change from Muhammadu Buhari to Bola Tinubu does not trigger any change in Nigeria’s long term risk? One way to read that is that they (or their computer model) don’t think anything will change under a new government and so no change is required. But their rating report also says this:
We expect a somewhat more technocratic, market-friendly, and reformist government under the new president, Bola Tinubu of the ruling All Progressives Congress, who won March’s general election, with 37% of the vote, on a 27% turnout. However, significant reform momentum is far from assured given this weak mandate, lack of a majority in the House of Representatives, and social pressures against important reforms. We do not anticipate that the numerous legal challenges will lead to the election result being overturned.
The clue to this double-speak (they expect reforms but don’t think anything will change) might be in the way the ratings notches work especially for countries at what is the cliff-edge. Nigeria sits at B- which is defined as a ‘significantly elevated level of default risk relative to other issuers’. To get worse than that takes you into C territory which is a very high level of default risk. At this point, the markets have pretty much lost all confidence in you and will only lend to you at credit card rates. Ghana was downgraded to CC last year by Fitch (‘the level of default risk is among the highest relative to other issuers’) and they had defaulted to all intents and purposes.
How about an improvement? Say that Fitch thought Tinubu’s reforms were good enough to positively change Nigeria’s outlook, what might they rate the country’s risk of default as? A BBB rating will indicate ‘a moderate level of default risk relative to other issuers’ in a region where Ghana has just defaulted and with Nigeria’s fiscal situation as bad (if not worse).
In summary, the coming change in government in Nigeria, and whatever reforms come with it, will not have the kind of impact to change the country’s risk from ‘significant’ to ‘moderate’. But neither will it be so bad as to make Nigeria’s risk the highest in the neighbourhood (there are some really crazy guys in Nigeria’s neighbourhood).
Things will be stable but in a negative equilibrium.
Addendum: We like feedback here at 1914 Reader and a friend of the house says that my use of ‘double-speak’ above might be a bit unfair on Fitch given that they have been burnt in the past by being too optimistic on Nigerian reforms. Thus ‘wait-and-see’ might be a better representation of their approach. I agree.