Fitch: Weak Nigerian Economy Will Endanger Fiscal Consolidation

Weaker growth will make it harder to contain Nigeria's rising debt burden, Fitch Ratings says.

Fitch has substantially cut its growth forecasts for Nigeria to reflect a weak performance in 1H16 and continuing policy challenges, including implementing the new foreign-exchange regime and delays in the disbursement of the 2016 budget.

“We expect real GDP to contract by 1% in 2016, compared with our earlier forecast of a 1.5% expansion. We expect a limited bounce back and forecast a recovery to 2.6% next year, with downside risks if dollar liquidity remains tight. The medium-term growth outlook remains significantly lower than the 5.6% growth seen in 2010-14.

“Our revisions incorporate a weaker-than-anticipated first half performance,” it said, adding further that GDP shrank 2.1% yoy in 2Q16, the second consecutive fall. Much of the contraction was due to falling oil production, which shrank from an average of 2.1 million barrels per day (mbpd) in 1Q to 1.7mbpd in 2Q.

An improving situation in the Niger Delta region will prevent further production loss, but levels are not likely to reach 1Q levels this year.

The non-oil sector shrank, by 0.4%, for the second consecutive quarter, because of spillover from the oil sector, energy shortages, and lack of foreign exchange for domestic industry.

According to the Central Bank of Nigeria, August marked the eighth straight month of declining production levels, new orders and raw materials inventories.

The more flexible FX framework implemented in June has allowed the naira to depreciate, but the amount of dollars traded in the official market and available to the banking system and domestic industry remains limited.

The declining parallel market rate continues to keep the spread above the official rate high.

Fitch's view is that dollar liquidity will not significantly improve until market participants become more comfortable with the sustainability of the exchange-rate level, which is likely to require further narrowing of the spread between the official and parallel market rates. While FX depreciation will push up inflation further, increased dollar liquidity would partially offset this as FX rationing has created shortages in the supply of imported goods.