Moody’s Investors Service, over the weekend, downgraded the Federal Government of Nigeria’s long-term foreign-currency and local currency issuer ratings to Caa1 with a stable outlook. Also affected by the ratings is Nigeria’s foreign currency senior unsecured debt. All are now assigned a Caa1 rating with a stable outlook from B3 which it assigned them in October 2022.
The current downgrade equally affected Nigeria’s foreign currency senior unsecured MTN program which is now assigned (P) Caa1 from (P)B3. The France-based ratings agency cited the likely continuation in the deterioration of Nigeria’s fiscal and debt positions as the basis for the downgrade.
“Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate is the main driver behind the rating downgrade. 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.
“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. 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.
According to Moody’s, obligations rated B are considered speculative and regarded as having high credit risk. In addition, obligations rated as Caa are considered to be of poor standing and are subject to very high credit risk, implying that Nigeria’s long-term foreign-currency, local currency issuer, foreign currency senior unsecured debt and foreign currency senior unsecured MTN program are all considered to be of poor standing and are subject to very high credit risk.
Concerning Nigeria’s fiscal outlook, which formed the basis of the downgrade, Moody’s said that interest payments will consume about 50% of Nigeria’s revenue over the medium term, up from 35% in 2022. It further stated that public debt to GDP ratio will rise to 45% up from 35% in 2022 and 19% in 2019.
In the third quarter of 2022, Nigeria spent $801.23 million on debt servicing, out of which multilateral debt servicing accounted for 27%; bilateral, 16% while commercial debt servicing gulped 56%. In 2021, Nigeria spent $2.109 billion on debt servicing, and the huge amount expended on debt servicing has started having a strain on government’s ability to execute many infrastructure projects.
Moody’s added that Nigeria’s outlook remains stable, even as it will take a while for the next president to reverse the deterioration in country’s fiscal situation.
“The capacity of the government to reduce its fiscal deficit in the shorter term is limited, but the debt amortization profile remains favorable for now, providing a time-window for the government to consolidate its fiscal position and foster confidence. During that timeframe, the government’s past and more recent efforts to raise non-oil revenue may yield more tangible results.
“On the other hand, should the government fail to deliver on fiscal consolidation, the government will devote an increasing share of its revenue to paying interest, potentially to the point where a debt restructuring is required to lower the burden on the budget,” Moody’s added.
Meanwhile Reuters reported today that Nigerian government bonds fell as investors reacted to the downgrade by Moody’s.
“Longer-dated bonds were down the most, with the dollar-denominated 2051 Eurobond falling more than 2.8 cents in the dollar to 68.758 cents according to Tradeweb data. Only the Eurobond maturing this year fell less than 1 cent,” Reuters reported.