Fitch Assigns Oyo ‘B-‘ IDR, Outlook Stable

Fitch Ratings assigned Oyo State a ‘B-‘ Long-Term IDR with a Stable Outlook on Tuesday, assessing Oyo’s Standalone Credit Profile (SCP) at ‘b’.

The ratings **take into account** Oyo’s dependence on central government transfers for revenue, despite an increase in internally generated revenue (IGR).

The ‘b’ SCP reflects Oyo’s manageable **level of** debt with limited foreign-currency exposure. The IDRs are capped by the sovereign’s ‘B-‘ ratings, and the Stable Outlook on the IDRs **mirrors** that on the sovereign.

Oyo’s ‘vulnerable’ risk profile indicates a high risk of the state’s ability to cover debt service weakening unexpectedly. This could be due to lower-than-expected revenue, higher-than-expected expenditure, or an unexpected rise in liabilities or debt-service requirements.

Oyo’s revenue robustness is influenced by the state’s overall weak socio-economic profile and reliance on volatile transfers from the federal government. Although the state has improved its IGR, oil-related federal transfers still represent a significant portion of total revenue. The reform of the land-use charge could sustain the increase in non-tax IGR.

Oyo’s revenue potential depends on the state’s ability to broaden its tax base and enforce tax compliance. The ability to expand the tax base is viewed as limited due to the large informal economy and low income levels.

Oyo has high spending needs, covering the social sector (39%) and economic development (40%). The state is exposed to a deteriorating operating environment influenced by high inflation, rising commodity prices, and supply constraints amid naira depreciation.

Oyo’s cost structure is moderately rigid, with staff-related payments making up two-thirds of the state’s operating expenses (opex). Limited scope for adjustability is envisaged, especially concerning planned infrastructure investments.

Oyo’s debt structure is fairly conservative, but the state’s liquidity is considered weak, lacking committed liquidity lines. Emergency liquidity may come directly from the federal government, helping states meet liquidity shortfalls and fund payments.

Fitch deems Oyo’s liquidity as weak, and the state has no committed liquidity lines. Domestic banks rated in the ‘B’ category tend to extend credit lines with short maturities or with backup from the federal government for longer maturities.

Under Fitch’s rating case, Oyo’s debt payback ratio hovers around 8x in 2026-2027. The debt sustainability assessment is overridden to ‘a’ as some volatility in the operating balance is factored in.