Oil prices boom means subsidy doom for Nigeria – Fitch

Fitch Ratings said that the decision of the Federal Government to reverse its plan to phase out the implicit fuel subsidies that support price controls on petroleum would reduce benefits accruing from increase in oil price.

It disclosed this in its latest report released on Monday titled ‘Fitch affirms Nigeria at ‘B’; Outlook stable’ which  affirmed Nigeria’s long-term foreign-currency issuer default rating at ‘B’ with a stable outlook.

The report said, “Higher oil prices would also boost the subsidy cost, denting the benefit of higher global oil prices to the budget.

“We forecast the 2022 general government fiscal deficit to remain broadly unchanged from 4.1 per cent of Gross Domestic Product in 2021. However, we estimate that $10 per barrel increase would narrow the fiscal deficit by 0.5 per cent of GDP.”

The key rating indications of the report showed that higher global oil prices would drive an improvement in external liquidity and support near-term economic growth.

These improvements are balanced against high hydrocarbon dependence, which leaves Nigeria vulnerable to negative oil price shocks, and structurally low domestic revenue mobilisation.

Fitch stated that, “The continuation of fuel subsidies will limit upside from higher oil prices on Nigeria’s public finances.

“Forecasts are based on Fitch’s December 2021 oil price assumptions ($70 per barrel in 2022 and $60 per barrel in 2023), but Fitch has considered alternate oil price scenarios, including oil prices at current levels.”

It added that, “While substantially higher oil prices could lead to a higher outcome of Fitch’s Sovereign rating model, we could deem such a change temporary and reflective of Nigeria’s high exposure to oil prices, which also entail heightened risks of a renewed downcycle.”