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Nigeria’s GDP to grow by 2% in 2021- Fitch Ratings

March 23, 2021
Stephen KotochiebyStephen Kotochie
in Sub Top Stories, Africa, Sub Top Stories2, World
0
infrastructure

President Muhammadu Buhari, President of Nigeria

Nigeria’s GDP is set to rise to 2% this year, following a 1.8% contraction in 2020. Thus, reflecting favorable base effects and the rise in oil prices, Fitch Ratings forecasts.

This growth rate, however, is above the IMF’s revised growth projection of 1.5%. Also, it falls between 1.7% and 2.0% by United Capital- a Financial and Investment Services Company.

This rebound in GDP growth tends to be smaller than that of its regional peers like Ghana (4.2%- IMF). The rebound, as anticipated, will face constraints from the scarcity in forex reserves, infrastructure gaps, electricity outages and security-related disruptions.

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This notwithstanding, Fitch notes that the country’s medium-to-long-term outlook could improve, if the long-awaited Petroleum Industry Bill enters approval. Currently, the Bill is undergoing examination by the parliament.

Fitch stays Nigeria’s Rating at ‘B’

Considering the foregoing, Fitch therefore affirms Nigeria’s ’B’ rating with stable outlook. Nigeria’s largely-sized economy, a low government debt-to-GDP ratio, small foreign currency (FX) indebtedness supports the rating action.

Other considerations by the Ratings firm include a relatively developed financial system coupled with a deep domestic debt market.

According to Fitch, the rating is, however, constrained by particularly weak fiscal revenue. Also, comparatively low governance and development indicators, high dependence on hydrocarbons and a high inflation.

Fitch indicates that Nigeria still travails with external liquidity pressures as a result of the 2020 pandemic-related shock. Also, the country is prone to adverse shocks from external developments.

Despite the moderate depreciation in exchange rate last year, the naira remains overvalued. This coincides with a persistent double-digit inflation under a tightly managed multiple-window exchange-rate regime. This development could further misalign the currency relative to economic fundamentals, Fitch warns.

Fitch, therefore, forecasts inflation to average 16.0% in 2021 and 13.4% in 2022, propelled by an array of cost-push factors.

Balance of Payment Problems

Furthermore, Fitch observes that the overvaluation of the naira will hamper the correction of external imbalances. Historically, Nigeria’s long-standing current account surplus shifted to a deficit of 4.2% of GDP in 2019, driven by a fast rise in imports.

Based on current developments, Fitch estimates a stable current account deficit of 4.2% of GDP in 2020 to narrow to an average of 1.6% from 2021 to 2022.

Moreover, downward pressures on the naira and an unshifting current account deficit could strain international reserves, amid a declining outlook for FDI and portfolio inflows.

At their current levels, international reserves would cover five months of the current account payments forecast for 2021, better than the median of 4.2 months for ‘B’ countries.

The federal government is also planning to enhance external concessional borrowing and ensure a possible sovereign Eurobond issuance to support FX reserves.

Fitch forecasts that the government’s fiscal deficit will decline to 4% of GDP in both 2021 and 2022, from 6.3% in 2020. This deficit is better than the forecast ‘B’ median of 7% and 4.8%, respectively.

Accordingly, the driver of improvement in the deficit will be the rebound in oil prices above the level predicted in the 2021 budgetary forecast as well as with the rebound in economic growth.

READ ALSO: The economy is on a rebound with a sustained momentum – BOG

Tags: Exchange ratefiscal deficitFitchinflationNigeria GDP

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