The upgrade, detailed in a commentary released late Friday, underscores Fitch's growing assurance in the Nigerian government's commitment to a series of policy reforms initiated since the adoption of more conventional economic strategies in June 2023. These key reforms include the liberalization of the exchange rate, the implementation of tighter monetary policies, decisive steps to curb deficit monetization, and the politically sensitive move to eliminate fuel subsidies.
Fitch's rationale for the stable outlook hinges on the expectation that the current macroeconomic policy direction will lead to sustained improvements in the functionality of Nigeria's foreign exchange (FX) market. The agency anticipates that these policies will also contribute to a gradual moderation of inflation, although it acknowledges that inflation levels are likely to remain significantly higher than those of its peer countries in the 'B' rating category.
Furthermore, the stable outlook reflects Fitch's projection of a continued reduction in Nigeria's external vulnerabilities. This is expected to be driven by a further easing of domestic foreign currency supply constraints, coupled with anticipated renewed reforms within the energy sector, which should help maintain the current account surpluses.
Highlighting the positive impact of increased transparency in the FX market, Fitch noted the Central Bank of Nigeria's (CBN) recent introduction of an electronic FX matching platform and a new FX code aimed at enhancing both transparency and efficiency within the market.
These measures, alongside the tighter monetary policy stance, have contributed to a notable increase in FX liquidity and greater overall stability in the FX market. This follows a significant 40% depreciation of the naira in 2024, which had previously widened the gap between the official and parallel exchange rates.
Fitch reported a substantial 89% increase in net official FX inflows through the CBN and autonomous sources in the fourth quarter of 2024, compared to a modest 8% increase in the same period of 2023. While acknowledging the positive trends, the rating agency anticipates a modest depreciation of the naira in the short term, even as it expects the continued formalization of FX activity to provide underlying support for the exchange rate.
Addressing the potential impact of the 14% US tariff imposed on Nigeria, Fitch believes the effect on Nigeria's trade position with the United States will be limited. This assessment is based on the exclusion of oil-related exports from the tariff, which constituted approximately 92% of Nigeria's total exports to the US in 2023, representing nearly 2% of Nigeria's GDP.
Fitch suggests that a more significant risk to Nigeria's economic outlook would be a decline in global oil prices, as this could weaken external buffers and fiscal metrics, thereby putting the new policy framework to the test. Nevertheless, the agency concluded that the greater policy flexibility now evident in Nigeria enhances its ability to effectively manage and respond to external economic shocks.