Fitch Upgrades Credit Ratings of Lagos, Kaduna, Kogi, Oyo, Citing Stronger Macroeconomic Fundamentals

 In a major boost to Nigeria’s economic outlook, global ratings agency Fitch has upgraded the Long-Term Foreign- and Local-Currency Issuer Default Ratings of Lagos, Kaduna, Kogi, and Oyo States from ‘B-’ to ‘B’, reflecting improved macroeconomic stability and the positive impact of recent policy reforms at the federal level.

The upgrade, announced on Fitch’s website on Saturday, follows the agency’s elevation of Nigeria’s sovereign credit rating from ‘B-’ to ‘B’ earlier this month, with a Stable outlook maintained for all four states.

According to Fitch, Nigeria’s intergovernmental fiscal framework—dominated by the federal government’s control of key revenue transfers to the states—means that sovereign rating changes are mirrored at the sub-national level.

“We consider the Federal Government’s role predominant in intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states,” the agency stated.

Key Drivers Behind the Upgrade
Fitch highlighted several macroeconomic factors supporting the ratings revision, including:

A sharper-than-expected depreciation of the naira, projected to exceed ?1,500 per dollar between 2024 and 2028.

Persistent but gradually declining inflation rates.

A more than 20 percent increase in federal VAT and oil-related transfers to states in 2024.

Despite these gains, Fitch warned that the weakening naira poses significant debt service risks, particularly for states with large exposures to external borrowing.

Kaduna State, where 86% of its direct debt is denominated in foreign currencies, faces heightened currency risks despite enjoying strong operating margins of around 40%, bolstered by improved internally generated revenue and federal transfers. Nevertheless, Kaduna’s payback ratio—an indicator of debt repayment capacity—is projected to remain high at 18 times, signalling weak debt service ability.

Kogi State, meanwhile, remains heavily invested in ambitious capital projects. Its payback ratio is forecast at around 20 times, with vulnerability to oil revenue fluctuations flagged as a key fiscal risk.

In contrast, Lagos State’s outlook appears much brighter. Although 50% of its debt is in foreign currencies, Fitch projects a robust payback ratio of just five times by 2028. The agency cited Lagos’s exceptional internally generated revenue, accounting for 75% of its total operating revenue (compared to a 25% national average), as a major strength. Lagos is also expected to record a budget surplus in 2024.

For Oyo State, with a predominantly local-currency debt portfolio, foreign exchange risk is lower. Its payback ratio is projected to stay below nine times, although heavy reliance on oil revenues and weaker secondary fiscal metrics remain concerns.

Environmental, Social, and Governance (ESG) Factors
Fitch also assessed ESG risks across the four states:

Kaduna, Kogi, and Oyo received an ESG Relevance Score of 4 for Biodiversity and Natural Resource Management, reflecting their dependency on oil revenues.

Kaduna additionally faces challenges related to ethnic conflict, energy management inefficiencies, and widespread poverty.

Despite a strong standalone credit profile rated at ‘b+’, Lagos’s overall rating remains capped by Nigeria’s sovereign ceiling. Kaduna, Kogi, and Oyo maintain ‘b’ standalone profiles, characterised by vulnerable risk profiles but improving financial fundamentals.

Sanwo-Olu Welcomes Upgrade
Reacting to the development, Lagos State Governor Babajide Sanwo-Olu hailed Fitch’s upgrade as validation of his administration’s policies and project execution.

“This is a good verdict on our performance in terms of policy decisions and project execution. It is also a call for us to be more active; we will be in every sector. I thank Lagosians for their support,” Sanwo-Olu said.

The governor emphasized that Lagos’s ability to withstand external shocks, including currency volatility, was rooted in its solid financial base. He reaffirmed his administration’s commitment to driving sustainable economic growth through prudent financial management and strategic investments.