Fitch Speaks on Nigeria’s Ability to Clear Forex Backlog to Airlines, Others

• Global credit rating agency Fitch has said Nigeria's apex bank does not have what it takes to clear forex backlogs
• The agency also said the revenue ratio in the country is a key weakness in its sovereign credit rating
• It added that the foreign exchange shortage could further heighten the pressure on the Nigerian currency

Legit.ng journalist Zainab Iwayemi has over three years of experience covering the Economy, Technology, and Capital Market.

Fitch, a global credit rating agency, has stated that the Central Bank of Nigeria (CBN) does not have enough foreign exchange (Forex) to clear the country's demand backlog.

Gaimin Nonyane, the director of Middle East and Africa sovereigns at Fitch, said this in a webinar, according to a Vanguard report.

She also warned that the country's revenue ratio is a key weakness in its sovereign credit rating.

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She said:

‘‘Nigeria’s central bank still lacks the foreign exchange to clear the backlog of demand, and the country’s high interest payment to revenue ratio weighs on its sovereign credit rating.’’

Nonye added that the pressure on the naira could continue due to the country's forex shortages and high interest rates. She said the gap between the official and parallel rates is already 30%.

She stated:

“We think that the central bank is still very well short of the amount it needs to be able to clear the foreign exchange backlog and also meet the substantial external financing by the private sectors.”

In a recent development, however, the CBN warned forex defaulters in the country to desist from gross abuse of forex activities and significant non-compliance with market regulations.

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Sidi Ali, the CBN's acting director of communications, said the apex bank commissioned an independent forensic review by a reputable firm to look into issues relating to the forex exchange in the country.

She said the result was grave infractions, gross abuse, and significant non-compliance with market regulations.

The CBN spokesperson added that sanctions will now be enforced in partnership with relevant agencies.

According to Charles Abuede, a financial analyst, Fitch's assertion that Nigeria's Central Bank about Nigeria's creditworthiness raises concerns.

He said this could impact investor confidence, potentially leading to capital outflows and hindering foreign investment.

He added,

"Remember in September 2023, the FTSE 100, in a publication said it planned to downgrade Nigeria’s index to uncategorized owing to the same FX backlog clearance issues. I think that the challenge in managing forex backlogs suggests potential volatility in the exchange rate, affecting trade and economic stability.

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"Whichever response the CBN adopts to these liquidity issues may necessitate adjustments in interest rates, impacting inflation and overall economic performance. The government's ability to service its debt and conduct international trade relations may also be at risk. Credit rating agencies' opinions often prompt policy adjustments as governments strive to maintain or improve their credit ratings."

Union Bank placed under 'negative watch'

Legit.ng earlier reported that Fitch Ratings placed Union Bank of Nigeria PLC's Issuer Default Ratings (IDRs), Viability Rating (VR), and National Ratings on Rating Watch Negative (RWN).

Companies placed on RWN have circumstance(s) that might cause a rating agency to downgrade its credit rating soon.

The rating agency reported that this became necessary following the CBN announcement on January 10, 2024, that it had dissolved the board and management of three Nigerian banks, including Union Bank.

Source: Legit.ng