Moody’s Investors Service has downgraded Nigeria’s long-term foreign-currency and local-currency issuer ratings and its foreign currency senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable.
This is the lowest rating by the global credit ratings agency in 17 years, even as it expects the government’s fiscal and debt position to continue to deteriorate, leading to the downgrade.
In a statement released on Friday, Moody’s said: “The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.
“Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates has intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items.”
Besides, it noted that the situation is further compounded by the fact that “The 2023 budget plans on an even larger fiscal deficit than in 2022, while the government’s funding options remain narrow and reliant on central bank financing.
“In addition, the government’s lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, thereby eroding further Nigeria’s external profile over time.”
… the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt increasingly coming at odds with other spending priorities.
Moody’s also downgraded Nigeria’s foreign currency senior unsecured MTN program rating to (P)Caa1 from (P)B3.
Obligations that are rated Caa are considered to be of poor standing and are subject to very high credit risk.”
It said further: “The oil production outlook as well as the securitization of past advances from the Central Bank of Nigeria (CBN) both remain uncertain. In particular, the securitization would bring a degree of fiscal relief but its lawfulness is being contested in Parliament and its passage uncertain.”
Socio-economic development
Additionally, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt increasingly coming at odds with other spending priorities.
“Under its baseline scenario, the rating agency projects that interest payments will consume about half of general government revenue over the medium term, up from an estimated share of 35% in 2022 and that general government debt-to-GDP will continue rising to about 45%, up from 34% in 2022 and 19% in 2019.
“Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates has intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items,” Moody’s said.
Although Moody’s feels that “At this stage, immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction that would raise the default risk,” it added that a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for February 25, and thereby support fiscal consolidation.
