Fitch Ratings has announced an upgrade to the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Kaduna, Kogi, Lagos, and Oyo states, moving them from ‘B-’ to ‘B’. The outlook for all four states remains Stable, according to the agency's website.

This rating action by Fitch directly follows the upgrade of Nigeria's sovereign rating to ‘B’ from ‘B-’ on April 11, 2025. The sovereign upgrade reflected Fitch's assessment of improved macroeconomic stability and ongoing policy reforms at the federal level.

Fitch explained that its rating criteria consider the federal government's central role in Nigeria's fiscal system, particularly its control over revenue equalization through transfers to the states. Consequently, the upgrade of the sovereign IDRs is mirrored in the ratings of Kaduna, Kogi, Lagos, and Oyo, as their Standalone Credit Profiles (SCPs) are assessed to be in line with or above Nigeria's sovereign rating.

Key Factors Driving the Upgrade:

Fitch's revised projections for the four states incorporate several key macroeconomic factors:

  • Steeper Naira Depreciation: The agency anticipates a more significant depreciation of the Nigerian naira, projecting it to exceed N1,500 to the US dollar between 2024 and 2028.
  • High but Declining Inflation: Fitch expects inflation to remain high but gradually decrease over the forecast period.
  • Increased Federal Transfers: The states have benefited from an increase of over 20% in federal Value Added Tax (VAT) and oil-related transfers in 2024, bolstering their financial positions.

However, Fitch also highlighted the increased debt service risks for states with substantial external debt due to the weakening naira.

State-by-State Analysis:

Kaduna State (‘bb’):

  • As of the end of 2023, 86% of Kaduna State’s direct debt was denominated in foreign currencies, exposing it significantly to currency risks.
  • Fitch projects Kaduna’s payback ratio (debt to operating balance) to remain around 18 times, indicating weak debt service coverage and a high debt burden relative to its revenue generation.
  • Despite these challenges, the state benefits from strong operating margins of approximately 40%, driven by consistent growth in Internally Generated Revenue (IGR) and increased federal transfers.
Kogi State (‘bb’):

  • Kogi State's debt profile includes a mix of domestic and foreign borrowings, primarily used for capital expenditure projects.
  • Fitch projects the state’s payback ratio to remain high at around 20 times over the medium term, suggesting considerable pressure on its ability to service its debt obligations.
  • The state's fiscal performance is characterized by high volatility due to its significant reliance on oil-related transfers from the federal government, making its budget balances vulnerable to fluctuations in global oil prices.
Lagos State (‘aa’):

  • At the end of 2023, 50% of Lagos State’s direct debt was denominated in foreign currencies, indicating a notable exposure to currency fluctuations.
  • Despite this, Fitch projects Lagos’s payback ratio to remain strong at around 5 times by the end of 2028, demonstrating a robust capacity to manage its debt.
  • The state's fiscal resilience is underpinned by its exceptional IGR, which accounts for 75% of its total operating revenue, significantly higher than the national average of 25%. This strong revenue base is also expected to result in a budget surplus for Lagos in 2024.

Oyo State (‘a’):

  • Oyo State’s debt profile is predominantly denominated in local currency, mitigating its exposure to foreign exchange risks.
  • Fitch expects the state’s payback ratio to remain below 9 times, supported by an increase in federal transfers.
  • However, fiscal volatility remains a concern due to Oyo’s substantial dependence on oil-related revenues and weaker secondary fiscal metrics compared to Lagos.

Standalone Credit Profiles (SCPs):

  • Lagos State holds an SCP of ‘b+’, reflecting a ‘Vulnerable’ risk profile combined with a financial profile assessed at the upper end of the ‘aa’ category. However, its IDRs are ultimately capped by Nigeria’s sovereign rating.
  • Kaduna, Kogi, and Oyo states each maintain ‘b’ SCPs, characterized by vulnerable risk profiles and financial metrics falling between the ‘a’ and ‘bb’ categories.

Environmental, Social, and Governance (ESG) Risks:

  • Kaduna, Kogi, and Oyo states each have an ESG Relevance Score of 4 for Biodiversity and Natural Resource Management, highlighting their significant reliance on oil revenues for financial support.

Kaduna faces additional ESG challenges, including:

  • Energy Management (ESG Relevance Score of 4): Marked by low efficiency and high dependence on the national grid.
  • Human Rights and Political Freedoms (ESG Relevance Score of 4): Ongoing ethnic conflicts continue to impact civil rights.
  • Human Development (ESG Relevance Score of 4): The state’s Human Development Index is below the national average.
  • Population and Demographics (ESG Relevance Score of 4): Below-average socio-economic indicators and a significant proportion of residents living below the poverty line.