Moody’s Investors Service has further downgraded Nigeria’s credit ratings into the non-investment grade category, popularly known as “junk”, just over three months after their last downgrade.
The global credit agency cut the Nigerian government’s long-term foreign currency and local currency issuer ratings as well as its foreign currency senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable.
According to Moody’s, Caa-rated obligations are considered disreputable speculative and are subject to very high credit risk.
Moody’s also downgraded Nigeria’s foreign currency medium-term senior unsecured notes program to (P)Caa1 from (P)B3.
The latest rating action makes it more difficult for the country to tap international markets for funds. In October last year, Moody’s downgraded the ratings of Africa’s largest economy to B3 from B2 and placed it on review for downgrade. The following month, another credit agency, Fitch Ratings, cut the country’s long-term foreign currency issuer default rating to B- from B.
“Moody’s expectation that the government’s debt and fiscal position will continue to deteriorate is the primary driver behind the downgrade,” it said in a statement on Friday. “The government faces extensive fiscal pressure, while the ability to respond remains constrained by institutional weaknesses and Nigeria’s long-standing social challenges.”
Ultimately, Moody’s says, the risk of a negative feedback loop setting in over the next two years between increased government borrowing needs and rising interest rates has intensified, exacerbating policy engagement. between servicing the debt and financing other key expenses.
He said that while the 2023 budget foresees an even larger fiscal deficit than 2022, the government’s financing options remain limited and dependent on central bank financing.
The agency said the government’s lack of access to external sources of financing would add to external pressure from depressed oil production and capital outflows, further eroding the country’s external profile over time.
“At this stage, immediate default risk is low, assuming there are no sudden and unexpected events, such as another shock or a change in policy direction that would increase default risk,” Moody’s said.
He said that while a new administration could reinvigorate reform momentum in Nigeria after general elections scheduled for February 25, 2023 and thus support fiscal consolidation, implementation would likely drag on amid stark constraints. social and institutional.
“In fact, the government has long maintained the goal of increasing non-oil revenues and phasing out the costly oil subsidy, but these goals require reforms that are institutionally, socially, and politically difficult to carry out. In the meantime, financing conditions are likely to remain tight.”
Also read: Fitch joins Moody’s in downgrading Nigeria for ‘high debt service’
Moody’s has also lowered Nigeria’s local currency (LC) and foreign currency (FC) country ceilings to B2 and Caa1 respectively, from B1 and B3 respectively.
He said LC’s country ceiling at B2 remains two notches above the sovereign issuer rating, incorporating a degree of unpredictability from government actions, political risk and reliance on a single source of revenue.
“The FC country ceiling at Caa1 remains two notches below the LC country ceiling, reflecting significant transfer and convertibility risks given the history of imposing capital controls in times of low oil prices or falling oil production. oil,” he added.
Moody’s said the review for the downgrade focused on Nigeria’s fiscal and external position and the government’s ability to address continued deterioration, as well as alleviate its debt burden through any form of default, including debt swaps. or repurchases.
He said that fiscal pressure from falling oil production, the increasingly costly oil subsidy and rising interest rates will likely persist for the next two years, while a post-election policy response will likely take some time. time to lower the country’s fiscal position. more sustainable path.
As a result, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain limited, and that debt service will increasingly be at odds with other spending priorities.
Under its baseline scenario, the ratings agency projects that interest payments will consume roughly half of general government revenue in the medium term, up from an estimated 35% share in 2022, and that the ratio of government debt overall and GDP will continue to rise to around 45%. percent, up from 34 percent in 2022 and 19 percent in 2019.
“Government financing options are constrained, suggesting that the government will borrow at higher interest rates by at least 2023 and with a heavy reliance on domestic debt, including continued CBN borrowing,” it said. “The financial sector remains underdeveloped relative to many of Moody’s rated sovereigns globally, with the banking sector representing the largest segment (36 percent of GDP in assets) and already having large balance sheet exposure to government and CBN (42 percent based on banks rated by Moody’s)”.
