Fitch: Nigeria’s external debt expected to rise to $5.2bn in 2025

Fitch Ratings have forecasted that Nigeria’s external debt service will rise to $5.2 billion this year, highlighting challenges in public finance management after a minor delay in paying a coupon on the sovereign's $4 billion Eurobond last month. Despite these hurdles, Fitch Ratings recently upgraded Nigeria’s Long-Term Foreign-Currency Issuer Default Rating to 'B' with a stable outlook. Paul Gamble, Senior Director, Sovereigns at Fitch Ratings, detailed the drivers behind the ratings upgrade, citing confidence in the country’s reform drive and sustained momentum as key factors. The upgrade was underpinned by three main drivers: the reform progress in areas such as the foreign exchange market, the country's external finances, and the energy sector. The improved functioning of the foreign exchange market, liberalisation of the exchange rate, financing improvements, and the removal of fuel subsidies were vital components that led to the rating boost. Gamble also discussed concerns around Nigeria's budget deficit, noting that it is expected to increase to 4.1% of GDP in 2025. The challenges stem from expenditure pressures such as interest payments, public sector minimum wage increases, and the need for higher social spending. However, Fitch Ratings believe that Nigeria's external financing needs of $5.2 billion for this year are manageable, including the Eurobond repayment of $1.1 billion due in November. In terms of inflation, Fitch projects an average of 22% this year, emphasizing the importance of maintaining relatively tight monetary policy to contain inflation expectations. Gamble anticipates only a modest loosening of monetary policy before the end of the year to prevent any distortions or untoward movements in the exchange rate. Regarding the banking sector, Fitch Ratings foresee a widening non-performing loans ratio of over 5% this year. While the sector faces challenges, particularly with the capital requirements for smaller banks, it is not seen as a constraint on the sovereign rating. Mergers and acquisitions may be seen among smaller banks to meet capital needs. Looking ahead, Gamble outlined factors that could lead to a positive or negative rating action or upgrade for Nigeria. Positive triggers include further progress in reducing inflation, strengthening economic growth, improved external buffers, and continued fiscal reforms. On the contrary, reversing recent improvements or facing pressure on the external side, possibly from lower oil prices, could be negative factors. The impact of US tariffs on Nigeria is expected to be limited, with energy products, which account for 92% of Nigeria's exports to the US, being exempt. However, the second-round impact of lower global growth and commodity prices, especially oil, could pose challenges. Policy flexibility remains crucial for Nigeria to navigate domestic and global shocks effectively.