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Daniel Adaji
Despite upgrading the credit ratings of four Nigerian states, Fitch Ratings has raised concerns about rising currency risks that could weaken their financial stability.
The agency announced on its website that it has lifted the Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) of Kaduna, Kogi, Lagos, and Oyo states from ‘B-’ to ‘B’. The outlook for all four states remains Stable.
In the report accessed by Pointblank News on Sunday, Fitch explained that the action mirrors Nigeria’s recent sovereign upgrade from ‘B-’ to ‘B’ on April 11, 2025, driven by what it described as “improved macroeconomic stability and policy reforms.”
It stressed that the federal government’s influence over intergovernmental finances played a key role in the decision. “We consider the federal government’s role to be predominant in intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states,” Fitch stated.
However, the agency warned that the steep depreciation of the naira, expected to surpass N1,500 to the dollar between 2024 and 2028, could pose significant risks to states with large foreign debt portfolios.
Among the states reviewed, Kaduna faces the sharpest exposure to exchange rate volatility. Fitch revealed that 86 per cent of Kaduna’s direct debt was foreign currency-denominated as of 2023.
Although the state enjoys strong operating margins of about 40 per cent, its debt service burden remains heavy. Fitch projects Kaduna’s payback ratio to stay around 18 times, signalling weak debt coverage relative to revenue.
Kogi State also faces mounting debt concerns. Fitch noted that the state’s debt mix of local and external loans finances major capital projects but leaves Kogi vulnerable to oil market fluctuations.
The agency said, “Kogi’s budget balances are particularly sensitive to fluctuations in global oil prices,” projecting a payback ratio close to 20 times over the medium term.
Meanwhile, Lagos stands out for its stronger financial fundamentals despite exposure to foreign currency risks. Half of Lagos’s direct debt was in foreign currencies at the end of 2023.
Yet, the state’s exceptionally high internally generated revenue (IGR)—accounting for 75 per cent of operating income—places it on stronger footing. Fitch expects Lagos to maintain a payback ratio of about five times by 2028 and post a budget surplus in 2024.
Oyo State enjoys some protection from currency shocks, as most of its debt is denominated in local currency.
Fitch predicts Oyo’s payback ratio will remain below nine times, buoyed by higher federal transfers. Nonetheless, volatility persists. The state’s heavy reliance on oil revenues and weaker financial metrics compared to its peers pose ongoing fiscal risks.
Beyond fiscal metrics, Fitch also pointed to Environmental, Social, and Governance (ESG) challenges that weigh on the ratings. Kaduna, Kogi, and Oyo scored 4 for Biodiversity and Natural Resource Management, highlighting their dependence on oil earnings.
Kaduna, in particular, struggles with broader ESG issues. Fitch flagged concerns around energy inefficiency, low human rights standards due to ethnic conflicts, and poor socio-economic conditions.
“Kaduna records below-average socio-economic indicators and a significant proportion of its residents living below the poverty line,” Fitch said.
In terms of Standalone Credit Profiles (SCPs), Lagos holds a ‘b+’ rating, reflecting a vulnerable risk profile but strong financials near the top of the ‘aa’ band. Kaduna, Kogi, and Oyo each maintain ‘b’ SCPs, indicating vulnerable positions with financial scores ranging between ‘a’ and ‘bb’.
The agency stressed that, although the states’ ratings have improved alongside Nigeria’s, external debt exposure and structural weaknesses remain major obstacles to long-term fiscal sustainability.