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Moody downgrades Nigeria over worsening fiscal position

By Geoff Iyatse
23 October 2022   |   3:01 am
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,

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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. 

According to the global rating agency, the downgrade is driven by the significant deterioration in the country’s public finances and its external position, increasing pressure on the sovereign credit position despite the bullish crude oil market. 
“Moody’s assessment is that these developments are partly the result of weak governance and likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices,” its announcement said. 
It argued that policy levers available to manage weakening revenue and rising borrowing costs in the face of monetary issues across the globe are limited. 
Recall that The Guardian had earlier reported that the Federal Government faced a herculean task funding its bloated fiscal deficit amid the rising cost of borrowing. The monetary policy rate (MPR) has been raised by 400 basis points (bps), from 11.5 to 15.5 per cent since the current monetary tightening campaign started in May.
Other central banks, including the Federal Reserve System, have been in aggressive interest rate hikes to cool inflation. In the United States, interest rates have risen from near zero to 3.25 per cent, triggering a de-risking across markets, with the emerging market being the worst hit.

Hence, Nigeria’s 10-year sovereign bonds have spiked by over 100 per cent year to date (YTD) and now averaging 13 per cent. Analysts have warned that the Federal Government, whose total debt and contingent liabilities are now over N60 trillion. 
Moody’s downward review comes months after JP Morgan similarly delisted Nigeria from the list of emerging market sovereign recommendations that investors should be ‘overweight’ in.    

The leading American investment bank also cited the country’s inability to convert the gains of bullish oil prices as subsidy payment weighs heavily on its fiscal stability.
Moody was worried that the capacity of the Central Bank of Nigeria (CBN) to protect foreign exchange reserves from external outflows is limited by the current restrictive monetary stance.
“The initiation of the review for downgrade is prompted by the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government’s capacity to service debt and thereby increasing further its risk of default. The review will focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressure and assessing the associated default risk for the government’s private creditors,” Moody’s stated.     
It added that the government “publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition”.
The organisation concurrently lowered Nigeria’s local currency (LC) and foreign currency (FC) country “ceilings to B1 and B3 respectively, from Ba3 and B2 respectively.” 
It highlighted the “unpredictability of government actions, political risk and the reliance on a single revenue source” as significant concerns. 
According to the statement, the downgrade also reflects significant transfer and convertibility risks are given the track record of imposition of capital controls in times of low oil prices.
“Nigeria’s fiscal and external position hasn’t benefited from higher oil prices in 2022, which have been 42 per cent higher on average than in 2021. This is due to the 32 per cent drop in oil production since the beginning of the year (recorded between January and September of 2022) and growing domestic consumption of petroleum products – a product of the country’s economic development further incentivised by the expensive oil subsidy. 
“The constraints on oil production increasingly appear structural, caused by repeated theft and lack of investment in infrastructure. While the oil sector is a relatively modest contributor to GDP, it is a primary source of revenue and foreign exchange generation,” it stated.

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