Afrinvest Weekly Update | Credit Rating Outlook Upgrade, Cybersecurity Levy Upscale… Is Nigeria at a Cross-road?
An Extraction of the Afrinvest Weekly Economic & Market Report for May 10th, 2024
This week, we share our perspective on the recently published rating action commentary on Nigeria by Fitch Ratings and the CBN’s circular on the commencement of a 0.5% cybersecurity levy on non-exempted electronic transactions effective May 20, 2024. Starting with the former, Fitch Ratings – a globally renowned credit ratings agency – revised upward, Nigeria’s long-term Foreign Currency Issuer Default Rating (FCY-IDR) outlook to “Positive” from “Stable” previously, while also affirming IDR at "B-" (same as in the last rating note in November 2023).
For context, a credit rating is a two-pronged gauge which on one hand, shows the current creditworthiness of a sovereign, business, or an entity based on the performance assessment of key economic, financial, legal, and ESG barometers over a reviewed period (usually between 6 to 12 months). On the other hand, it projects the likely shift in creditworthiness status based on an ongoing or future policy action, strategy undertone, and regulatory changes. Based on globally acceptable conventions, credit rating scores between “AAA and BBB-“ (or “Aaa and Baa3”) are deemed as “Investment Grade”, while rating scores between “BB+ and D” (or “Ba1 and /”) are categorised as “Speculative or Junk Grade”. Furthermore, the assessment verdict on the outlook for the IDR could either be Positive, Negative, or Stable, depending on the overwhelming direction of changes to the considered barometers. The newly issued positive outlook implies that Nigeria’s IDR could be improved to “B” during the next rating review in six to twelve months, should majority of the considered barometers be further improved upon. Historically, Nigeria’s best-ever FCY-IDR rating since Fitch began rating her in 2006 is “BB-“, and this status was maintained for eight years till 2014 on the back of stable macroeconomic fundamentals.
The recent upward outlook review was hinged on ongoing fiscal and monetary policy reforms, notably, the reduction in fuel subsidy burden, the scale back on deficit financing through Ways & Means, the reduction in official vs parallel market FX rate distortion, the reversal of the retrogressive capital control (about $4.5bn out of estimated $6.8bn FX forward backlogs has now been paid), as well as the notable improvement in crude oil output in Q1 (output peaked at a 24-month high of 1.64mbpd in January 2024 including condensates). In our view, the favourable ratings review underscores the fact that the current FG and the new leadership at the CBN have begun to correct some of the retrogressive footprints of the Buhari and Emefiele-led FG and CBN respectively, which saw Nigeria’s IDR drop three steps from “BB-“ in 2015 to “B-“ in November 2022.
More so, the timing of the positive rating commentary by Fitch Ratings could be pivotal to the favourable pricing of Nigeria’s planned Eurobond issuance next month, given that the resurgence of inflationary pressure in major economies has delayed rate cuts by systemic central banks to the disadvantage of emerging economies like Nigeria. Furthermore, the favourable review of Nigeria’s IDR would also be critical to banks' plan of raising FCY capital in the race to meet up with the recapitalisation benchmark set for different licensing categories (International: ₦500.0bn, National: ₦200.0bn, Regional: ₦50.0bn).
However, we flag that signs of policy fatigue are beginning to manifest from both the fiscal and monetary authorities, raising concerns about the possibility of bottling the gains made so far in the near term. For instance, the political will that delivered gradual improvement in crude oil production over the six months to January 2024 seems to have dissipated. Also, several allegations have emerged that the amount currently expended on "backdoor" monthly fuel subsidy payments is way above the pre-subsidy removal period. In addition, there is renewed pressure on the FX rate, accompanied by growing divergence between the official and parallel market rates. This has a loop effect on market perception, fueling speculations that the recovery in exchange rate between March and April 2024 was artificially conjured. As such, we canvass that the fiscal and monetary authorities reignite their commitment and double down on efforts to boost crude oil output, temper inflation, and stabilise the exchange rate.
Finally, Fitch Ratings highlighted that Nigeria has an ESG relevance score of “5” for rule of law, institutional & regulatory quality, and control of corruption and a score of “4” for human rights and political freedom. These scores are below the minimal relevant ESG credit score of “3” and have a negative consequence on credit profile and global capital attraction through FDIs. As such, we re-echoed the overarching prognosis in our 2023 Nigerian Banking Sector Report “Getting Nigeria to Work Again!” that constitutional and institutional reforms are central to any lasting transformation that Nigeria desires.
In other development, the CBN in a circular to all Banks, Other Financial Institutions (OFIs), Mobile Money Operators (MOMOs), and Payment Service Providers (PSPs) on Monday issued guidelines on the collection and remittance of the revised cybersecurity levy on non-exempted electronic transactions in line with the provisions of section 44 (2)(a) of the Cybercrime Act 2024 (as amended). Except for sixteen categories of transactions including (i) loan disbursements and repayments, (ii) salary payments, (iii) intra-account transfers by a customer, (iv) intra-bank transfers between customers, (v) educational institutions transactions, and (vi) government social welfare programme transactions to mention but a few, electronic transactions would in addition to subsisting banks and FG charges (see table 2) attract 0.5% levy on the amount in question.
Based on available records, the Cybersecurity Act was first passed in Nigeria in 2015, with a minuscule levy of 0.005% on electronic transfers (about N5.0 deduction on every N100,000), and the deduction did not even commence until June 2018. Following the revision of the Cybersecurity Act in 2024, the cybersecurity levy accentuated by a hundred fold to 0.5%, implying that an electronic transaction of ₦100,000 would attract a cybersecurity charge of ₦500 in addition to a stamp duty charge of ₦50, a transfer fee of ₦50, VAT charge of ₦3.75 and SMS fee of ₦4. While the FG has a compelling case for increasing the cybersecurity levy, we opine that the significant nature of the increase could dissuade bank customers (especially the mid and low-income groups) from using electronic channels to facilitate transactions due to their already-constrained wallets. As such, we hold that the astronomic increase in the levy could further hamper the CBN’s goal of attaining a financial inclusion rate of 95.0% by 2024 year-end (financial inclusion rate was 74.0% as of 2023-end).
Chart 1: Timeline of Fitch Credit Ratings for Nigeria and Macroeconomic Barometers
Source: Fitch Ratings, NBS, CBN, DMO, Afrinvest Research
* means estimates
Chart 2: General Charges on Bank Users in Nigeria… Are the Poor Really Breathing?
Source: CBN, Afrinvest Sampling