Kaduna’s Fiscal Debt Burden to Cross 400% – Fitch
Amidst rising borrowings to support revenue gap, Kaduna’s fiscal debt burden which equates to the state’s net adjusted debt over revenue could increase above 400%, Fitch Rating said in a report.
The global rating agency added that the state debt payback ratio which is the primary metric of debt sustainability assessment could deteriorate towards 20 years in the medium term.
The population density has been strengthened due to strong migration. According to Fitch, Kaduna’s fast-growing residents of over 8 million and a traditionally strong primary sector contribute to weak socio-economic standards.
The rating note reads that public sector remains a key employer in the state, directly and through its planned investment programmes.
In its effort to profile one of the top economic-based in the Northern region, Fitch said Kaduna has a large informal economy which hinders private-sector development. The structure is noted to affect the state’s internal revenue generation (IGR) tax base.
Its fiscal performance has improved in 2021, compared with 2020 and 2019, Fitch Ratings said, noting that the state operating revenue grew 18% compared with 2020.
The growth was attributed to a rebound of statutory and value added tax (VAT) allocations and the continued positive trend of tax IGR which jumped 16% above 2020 record. “Kaduna’s net Fitch-adjusted debt is expected to reach N600 billion in the medium term, or 4x times the state’s revenue”.
The rating note explains that state’s debt stock encompasses the effect of the Naira’s devaluation under difficult economic conditions and its ambitious capital expenditure plan of N500 billion in 2022-2026 to fund infrastructure construction and upgrade.
In its latest rating note, Fitch affirmed Kaduna state’s long-term foreign- and local-currency issuer default ratings at ‘B’ with a stable outlook. Its standalone credit profile is rated at ‘b’, reflecting the combination of a vulnerable risk profile and debt sustainability metrics.
Fitch said the ratings reflect Kaduna’s still significant, but declining, revenue dependency on transfers from the central government despite increasing internally generated revenue (IGR). It factors in the state’s growing debt to fund necessary capital expenditure for the development of basic infrastructures and social services.
Revenue Robustness: Weaker
According to the rating note, Kaduna’s revenue robustness is influenced by the state’s overall weak socio-economic profile and reliance on volatile transfers from the federal government. READ: Lagos State Fiscal Debt Burden to Hover Towards 150% – Report
Fitch views Kaduna state’s N132 billion operating revenue at the end of the fiscal year 2021 as dependent on allocations of oil revenue transferred monthly from the Federal Accounts Allocation Committee (FAAC).
It said such transfers represented on average 37% of operating revenue in 2021, albeit down from 50% in 2017. FAAC allocations in 2021 recovered to above their pre-pandemic levels, in particular value added tax (VAT), which is collected by the central government and allocated to the states through FAAC, almost double on 2020’s level.
Kaduna has substantially improved its IGR collection as IGR grew 16% year on year in 2021 to above pre-pandemic levels, according to the rating note. It said even in times of economic stress, Fitch expects Kaduna to sustain its positive trend of IGRs and envisages tax revenue growth (including VAT) on average of around 10% in 2022-2026.
“Under this scenario, we expect federal transfers to fall by 9% on average, due to volatile oil prices and possible changes in the composition of the FAAC revenue pool”.
Revenue Adjustability: Weaker
Kaduna’s revenue potential depends on the state’s ability to broaden its tax base and enforce tax compliance, the rating note stated. Fitch Rating said in the note that the main fiscal revenue is pay-as-you-earn taxes, on which Kaduna cannot set the tax rate, and land charges, for which the government is implementing measures to expand the tax base.
The ability to enlarge the pay-as-you-earn tax base is limited by the low level of income of the population, with 50% living below the poverty line, the global rating firm stated.
Expenditure Sustainability: Weaker
Fitch said Kaduna has a broad set of responsibilities and high spending needs to support the weak local economy. Its spending responsibilities range from education (25%), healthcare (15%), economic development (over 15%), energy and environment (around 8%), according to Fitch.
The state has shown a fair record of cost control over the last decade, with operating revenue and expenditure growing at a similar pace. However, Fitch expects spending growth to outpace revenue growth in the medium term in its rating case of a prolonged economic downturn.
The operating margin will remain in positive territory but is expected to decline around 25% from a last five-year average of 35% amid rising demand for public services.
In the state, it noted that capital expenditure plays a key role for Kaduna in transitioning the local economy to a more developed stage and growing the local tax base.
Expenditure Adjustability: Midrange
The Nigerian central government has no mandatory balanced budget rules for states, which are required to keep their deficits at 3% of national GDP.
Kaduna’s cost structure is moderately flexible, as around 45% of expenditure is capital expenditure, which is partly financed by the operating balance and can be delayed in case of need.
Fitch said after a sharp 50% decline in 2020, Kaduna’s operating costs increased 10% towards N70 billion in 2021 but remained below the pre-pandemic level of N80 billion in 2019.
“We expect overheads (50% of operating spending) to rise in line with inflation, which we forecast to average 13% in 2022-2026”. The global ratings firm believes that expenditure cutbacks will be limited given the large scope to increase healthcare services and infrastructures.
Liabilities & Liquidity Robustness: Weaker
Kaduna’s debt is mostly made up of multilateral lending and loans with local banks, with a small portion (5%) of inter-governmental loans. Over 90% of Kaduna’s debt is serviced by deductions from statutory allocation.
At end-2021, over 80% of Kaduna’s N303 billion Fitch-adjusted debt, including pension and contractor arrears, was in foreign currency and is subject to fluctuations of the Naira exchange rate.
Kaduna’s debt increased sharply, up 40% year on year, in 2019 following the first disbursement of a USD350 million loan from the World Bank. The state’s historical average cost of debt is below 1% for multilateral foreign debt, while domestic debt carries interest rates of around 10%. Kaduna’s debt-amortisation profile is smooth with long maturities and debt service at 1x its operating balance.
Liabilities & Liquidity Flexibility: Weaker
Fitch deems Kaduna’s liquidity as weak as the state has no committed liquidity lines and domestic banks rated in the ‘B’ category tend to extend credit lines either with short maturities or with backup from the federal government through direct deductions from FAAC for longer maturities. Fitch conservatively deems cash as restricted for payables.
Debt Sustainability: ‘bb category’
Under Fitch’s rating case of a prolonged economic downturn, Kaduna’s debt payback ratio (net debt/operating balance) – the primary metric of debt sustainability assessment – could deteriorate towards 20 years in the medium term, corresponding to a ‘bb’ assessment.
Kaduna’s fiscal debt burden (net adjusted debt/operating revenue) could increase above 400%, equivalent to a ‘b’ assessment, while its actual debt-servicing coverage will be 1x, consistent with a ‘b’ assessment.
#Kaduna’s Fiscal Debt Burden to Cross 400% – Fitch#