Moody’s downgrades Nigeria deeper into junk territory

Moody’s Investors Service has downgraded Nigeria’s credit ratings further into the speculative or “junk” territory, citing concern the government’s fiscal and debt position will deteriorate further.

The global credit agency cut the Nigeria’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. 

Moody’s has also downgraded Nigeria’s foreign currency senior unsecured medium-term note programme rating to (P)Caa1 from (P)B3.

The latest action brings the country’s rating seven levels below investment grade. Moody’s had in October last year downgraded the ratings of Africa’s biggest economy to B3 from B2 and placed them on review for downgrade. The following month, another credit agency, Fitch Ratings, lowered the county’s long-term foreign-currency issuer default rating to B- from B.

“Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate is the main driver behind the rating downgrade,” it said in a statement on Friday. “The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.”

According to Moody’s, 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. 

It said while the 2023 budget plans on an even larger fiscal deficit than in 2022, the government’s funding options remain narrow and reliant on central bank financing. 

The agency said the government’s lack of access to external funding sources would add to the external pressure from depressed oil production and capital outflows, thereby eroding further the country’s external profile over time.

“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,” Moody’s said.

It said while a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for February 25, 2023 and thereby support fiscal consolidation, implementation would likely remain lengthy amid marked social and institutional constraints. 

“Indeed, the government has long-held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially and politically challenging to carry through. Meanwhile, funding conditions are likely to remain tight.”

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. 

It said the LC country ceiling at B2 remains two notches above the sovereign issuer rating, incorporating some degree of unpredictability of government actions, political risk and the reliance on a single revenue source. 

“The FC country ceiling at Caa1 remains two notches below the LC country ceiling, reflecting significant transfer and convertibility risks given the track record of imposition of capital controls in times of low oil prices or falling oil production,” it added.

Moody’s said the review for downgrade focused on Nigeria’s fiscal and external position and the capacity of the government to address the ongoing deterioration – other than by alleviating the burden of its debt through any form of default, including debt exchanges or buy-backs.

It said fiscal pressure from falling oil production, the increasingly costly oil subsidy as well as rising interest rates would likely persist over the next couple of years, while a policy response post-election would likely take some time to put the country’s fiscal position on a 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 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 percent in 2022 and that general government debt-to-GDP will continue rising to about 45 percent, up from 34 percent in 2022 and 19 percent in 2019.

“Government funding options are constrained, suggesting that the government will borrow at higher interest rates in 2023 at least and with heavy reliance on domestic debt, including continuing borrowing from the CBN,” it said. “The financial sector remains underdeveloped relative to many of Moody’s rated sovereigns globally, with the banking sector representing the main segment (36 percent of GDP in assets) and carrying already large on-balance sheet exposure to the government and the CBN (42 percent based on Moody’s-rated banks).”