Lagos State has material exposure to foreign exchange (FX) risk as its already huge debt load is set to continue to rise in the medium term as a result of the steep devaluation of the naira.
The states external debt with development lenders increased to 54% of Lagos’s direct debt at end-2023 up from 43% at end-2022, due to the fast naira depreciation since June 2023, according to Fitch Ratings.
“We expect Lagos’s debt stock to keep increasing, driven by an expected over 1000 NGN/USD exchange rate over our scenarios from 900 NGN/USD at end-2023. Our scenarios consider that Lagos could hit N3 trillion of debt stock by 2026,” Fitch said in a Ratings update.
The government of President Bola Tinubu, who completed a year in office on May 29, devalued the naira twice in the past year in a bid to lure investors and restore the currency’s credibility.
The naira has already fallen from N951/$ at the end of December 2023 to N1,488/$ at the end of June 2024.
Lagos is also exposed to higher interest rates and refinance risk as bond issuances represented 19% of its N2.1 trillion debts at end-2023.
Home to 25 million residents, the Internally Generated Revenue (IGR) represented over 70% of Lagos’s N1.19 trillion operating revenue in 2023 and is driven by taxes such as personal income tax (PAYE).
Fitch does not view Lagos as reliant on government transfers from the Federal Account Allocation Committee (FAAC), as statutory allocations (excluding VAT) represent less than 10% of Lagos’s operating revenue.
Fitch believes that Lagos will more likely absorb possible revenue shocks by reducing its operating margin towards 35%-40% from the average 47% over the past five years.
“We expect Lagos’s net adjusted debt to reach N3.6 trillion in 2028 (from N2.1 trillion at end-2023), under a scenario in which the NGN/USD exchange rate remains above 1000,” Fitch said.
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