Fitch Ratings has upgraded four states in Nigeria — Kaduna, Kogi, Lagos, and Oyo — Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘B’ from ‘B-,’ with stable outlooks following the upgrade of Nigeria to ‘B’ on 11 April 2025.
Under Fitch’s rating criteria, the IDRs of Nigerian states are capped by those of the sovereign because it considers the federal government’s role predominant in intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states.
The upgrade of sovereign IDRs, therefore, is mirrored in the upgrade of those of Kaduna, Kogi, Lagos, and Oyo, as their Standalone Credit Profiles (SCPs) align with or are above the ratings of Nigeria.
Looking at the financial profile, Fitch’s revised rating case on these four states includes updated macro data.
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They envisage steeper naira depreciation, to more than 1,500 to the US dollar across 2024–2028, and high but declining inflation.
These positively affect the federal government’s allocation of VAT and oil-related transfers to states, which increased by over 20% on aggregate in 2024.
However, currency depreciation exposes states with high external debt to fluctuations in their debt service.
For Kaduna State — ‘bb’ — Fitch said, “We expect Kaduna’s payback to remain at 18x amid weak debt service coverage and a high debt-to-revenue ratio, weighed down by a material exposure to naira fluctuations.
“This is because 86% of its direct debt was denominated in foreign currencies at end-2023.
“Kaduna’s overall financial profile benefits from increases in internally generated revenue and federal transfers, which underpin its operating margin at about 40% over the medium term. We assume that any new debt will be denominated in local currency,” Fitch Ratings stated.
For Kogi State — ‘bb’ — Fitch said, “We expect Kogi’s payback ratio to stay at about 20x over the medium term. Oil-related transfers from the federal government support the state’s fiscal performance but also result in volatility in the operating balance due to the commodity’s price fluctuations.
“The payback ratio considers the effect of naira depreciation and new borrowings in domestic and foreign currencies to support its large capex plan.”
Explaining the Lagos State ‘aa’ ratings, Fitch stated, “We expect Lagos’s payback ratio to remain at around 5x by end-2028. Lagos’s incomparable level of internally generated revenue to other states (75% of operating revenue, versus a national average of 25%) and dynamic tax proceeds underpin its solid fiscal performance (budgetary surplus expected in 2024).
“This balances its high proportion of direct debt in foreign currencies (50% at end-2023), its high debt-to-revenue ratio of over 200%, and debt service coverage of above 1x.”
On Oyo State — ‘a’ — Fitch said, “We expect Oyo’s payback to stay below 9x, owing to higher transfers from the federal government and as its debt is mostly denominated in naira.
“We factor volatility into the operating balance due to the state’s large dependence on volatile oil-related transfers and its weak secondary metrics.”
The ratings agency highlighted that the ‘Vulnerable’ risk profile of these states reflects a very high risk that their ability to cover debt service with their operating balance may weaken unexpectedly over 2024–2028.
This, it added, may be due to lower-than-expected revenue, higher-than-projected expenditure, or an unanticipated rise in liabilities or debt-service requirements.
Fitch’s derivation summary shows that Lagos’s ‘b+’ SCP reflects a combination of a ‘Vulnerable’ risk profile and a financial profile assessed at the upper end of the ‘aa’ category, while its IDRs are capped by those of the sovereign.
“Kaduna’s, Kogi’s, and Oyo’s Long-Term IDRs are driven by their ‘b’ SCPs, reflecting a combination of a ‘Vulnerable’ risk profile and financial profiles assessed between the ‘a’ and the ‘bb’ categories,” it pointed out.
Fitch said that it does not apply any asymmetric risk or consider any extraordinary support from the central government.
According to the ratings agency, the next scheduled review dates for its ratings are 18 July 2025 (Kaduna and Lagos) and 25 July 2025 (Kogi and Oyo).
Fitch believes that the upgrade of Nigeria’s Long-Term IDRs warrants a deviation from the calendar, with the rationale outlined in the first part (high-weight factors) of the Key Rating.
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