Nigerian bonds head towards junk status, experts warn

The operators of the fiscal and monetary policies must devise novel ways of addressing the economic challenges confronting Nigeria will face more credit rating reviews from international bodies.

The Guardian had reported that Moody’s Investors Service has downgraded Nigeria’s local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2, placing them on review for further downgrade.

Reacting to this, the Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, said part of Nigeria’s challenge comes in converting the Central Bank of Nigeria’s (CBN) ways and means (W&M) to a 40-year bond.

On the implication of this rating he said: “There is zero revenue from oil sales. This is the major cause of the downward sovereign rating. At a time of global oil price rise triggered by geo-political tension, the Nigerian National Petroleum Company Limited has pursued a programme of unverifiable under-recovery payments in a direct sale direct purchase (DSDP) programme.”

Emmanuel expects the yields of Federal Government bonds to rise from an average of 13 per cent to between 17-20 per cent, even as investors will want to price in inflation to the yield curve and hedge the risk of default. This, he said, is because B3 is a not-primed issuer rating that is classified as a lower investment grade, sitting four steps from junk status.

According to Dairy Hills boss, the insistence of the Buhari administration to pursue a fiscal strategy that has relied on debts that not only raise the debt servicing to government revenue ratio but violates section 38 (3) of the CBN Act as amended in 2007, is an institutional risk. He said this culture has potential of raising the credit default swap of Nigeria from the current 990 basis points, while also debasing the currency.

Going memory lane, Emmanuel said: “In 2006, at 8.2 per cent inflation, and 6.1 per cent GDP growth, you needed 8.7 years to double the inflation rate and devalue the currency by a 100 per cent, and 11.6 years to double the GDP by 100 per cent, which was the foundation on which the former Minister of Finance, Dr. Ngozi Okonjo-Iweala, to rebase Nigeria’s GDP in 2011.

“Today, at a 20.77 per cent inflation rate, and 3.54 per cent GDP growth, you will need only 3.4 years to double the inflation rate, and devalue the currency by 100 per cent. Meanwhile, you need 20.3 years to double the size of Nigeria’s GDP – a clear signal that the country has regressed significantly.”

He said the recovery of the four-kilometre Forcados pipeline by the Nigerian National Petroleum Company Limited may be of help in the foreseeable future, arguing that the recovery is also proof that oil theft is an organised crime

“The discovery of a four-kilometre pipeline that stretches 2.5 miles from the forcados terminal into the ocean, and has been operational for the last nine years, and has contributed to the 600,000 barrels of crude oil stolen daily in Nigeria, impacting on the inability of the country to deliver its daily production quota promised to OPEC, is a proof that oil theft in Nigeria is organised crime, sanction by certain rogue elements close to the corridors of power.”

Emmanuel declared that if the Nigerian government fails to change course, and amend the finance act to raise the revenue-to GDP ratio from the current seven per cent, adopt wide cost-cutting measures, follow recommendations on stopping the PMS subsidy as well as adopting a free-floating exchange rate mechanism, the country is going to face risks that might have far-reaching negative consequences for the economy.

On his part, an oil and gas professional, Jide Pratt, said the downgrade is not surprising, saying: “It is based on their reading of the fiscal policy and FX crisis. The confidence of investment and exchange rate to exit these transactions are not getting better, hinged on the issues around availability.

Pratt, who is also the Chief Operating Officer of Aiona Nigeria, pointed out that low oil production is a source of concern as well.

He maintained that the CBN’s greatest task at the moment is creating a climate that would give some sort of comfort to foreign direct investments (FDIs) for a quick revival of the economy.