Kunle AderinokunÂ andÂ Obinna Chima
Following the downgrade of the Government of Nigeriaâ€™s long-term issuer and senior unsecured debt rating to B2 from B1 by Moodyâ€™s Investor Service, stakeholders and economic analysts have expressed their opinion on the implications for the economy.
The downgrade, which however came with a stable outlook, had been contested by the federal government.Â
Moodyâ€™s, which also downgraded theÂ senior unsecured MTN programme rating and the provisional senior unsecured debt rating to (P)B2 from (P)B1, attributed the downgradeÂ to â€œThe authoritiesâ€™ efforts to address the key structural weakness exposed by the oil price shock by broadening the non-oil revenue base have so far proven largely unsuccessful.Â
It added that, â€œAs a consequence, while debt levels remain contained and notwithstanding recent cyclical improvements, the governmentâ€™s balance sheet remains structurally exposed to further economic or financial shocks, with interest payments very high relative to revenues and deficits elevated despite cuts in capital spending.â€
Moodyâ€™s explained that, â€œThe stable outlook reflects the fact that the likelihood of a shock occurring that would further impair Nigeriaâ€™s economic and fiscal strength remains low, with external vulnerabilities having receded supported by the rebound in oil production, the current account projected to remain in surplus, and reserves boosted through external borrowings and increased foreign capital inflows. Medium-term growth prospects are also credit supportive.â€
The government, in its reaction, argued that the downgrade was inappropriate because it had initiated reformsÂ within the last two years to turn around the economy, in addition toÂ its plan to raise N710 billion ($2 billion) this year from the restructuring of the governmentâ€™s equity in the joint venture oil assets, as highlighted in the 2018 budget.
According to the government,Â â€œThe reform is aimed at increasing private sector equity participation to improve efficiencies in the sector and also provides revenue to the government which will be deployed solely and exclusively for creating new assets in Nigeria.â€Â
The federal government, which issued a statement to protest the downgrade, pointed out that, while the Federal Ministry of Finance, Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) respect the right of Moodyâ€™s to make this decision, â€œwe strongly disagree with the premise and must address some of the conclusions upon which the decision restsâ€.
â€œThis is equivalent to Nigeriaâ€™s existing B/Stable Outlook rating from S&P and slightly lower than Nigeriaâ€™s B+/Negative Outlook rating from Fitch.â€Â
According to the federal government, since Nigeria was last rated by Moodyâ€™s as B1 stable in December 2016, the country has successfully emerged from a protracted recession and recorded important improvements across a broad range of indices.
But in their views, analysts are not bothered about the downgrade as they are convinced that the reforms by the government have already put the economy on the path of recovery and growth, believing the rating would not affect the efforts by the government to raise capital from the bond markets.
According to the Director-General, West African Institute for Economic and Financial Management (WAIFEM), Prof. Akpan Ekpo, â€œThe downgrading is unfortunate but not worrisome.â€
â€œThe economy is technically exiting the recession within the context of stagflation. There is an economic recovery and growth plan for 2017-2020. The B score and stable is not alarming. Policy-makers and other stakeholders should continue to promote economic diversification so as to be on a positive growth trajectory,â€ he added.
Ekpo believed, â€œ Emphasis should be on building a strong domestic economy that can withstand shocks and these unnecessary ratings with complex and confusing variables would be irrelevant.â€
The Nigerian economy, he said,Â was â€œlarge enough such that proper management of its resources for the common good would make a mockery of ratings by certain agencies.â€
Similarly, CEO, The CFG Advisory Ltd, Adetilewa Adebajo, said unfortunately Nigeria movedÂ steps forward on ease of doing business and steps backward on ratings. Adebajo explained that the issues were around â€œrevenue generation shortfalls and sustainable debt service capabilities.â€ While noting that, â€œThis net effect is the increased cost of our offshore borrowings,â€ he believed â€œthe situation will not affect our capacity to access capital from the Eurobond markets.â€Â
The long-term outlook was also stable, which was a welcome positive development, Adebajo also stated.
Speaking along the same line of thought, Director, Union Capital Ltd, Egie Akpata, noted that, â€œThe timing of this downgrade is odd given that the worst seems to be over for the Nigerian economy. This downgrade seems to be more about alignment with the Nigeria ratings of S&P and Fitch.â€
Acknowledging that, â€œThe primary reasons for the downgrade are inability for the Federal Government to diversify its revenues away from oil and the high debt service costs relative to revenue,â€ Akpata saidÂ â€œNone of these are particularly new problems.â€
â€œI would have expected Moodyâ€™s to give the current administration some credit for making fixing these issues top on their agenda. It would be interesting to see if S&P or Fitch makes any changes to their Nigeria outlook or rating in the near term. This is unlikely given the improvements in macroeconomic indicators,â€ he argued.Â
â€œMarket reaction to the Moodyâ€™s downgrade is likely to be muted given some of the reasons mentioned above,â€ he added.
Ecobank Nigeria Analyst, Kunle Ezun,Â also faulted the decision by Moodyâ€™s, saying â€œfrom every indication Nigeria shouldnâ€™t be downgraded.â€
He explained: â€œThe business environment is looking positive. So with the improvement in the forex market and slowdown in inflation, one would begin to question Moodyâ€™s consideration.â€
In his own analysis, Executive Director, BGL Capital Ltd, Femi Ademola, while acknowledging that, the downgrade of Nigeriaâ€™s issuer and debt ratings by Moodyâ€™sÂ was premised on the governmentâ€™s unsuccessful efforts at addressing key structural weakness exposed by oil price shock by broadening non-oil revenue base, cautionedÂ that â€œthe economy remains structurally exposed to further economic and financial shocks.â€
Although, Ademola saidÂ the reasons were â€œvery correctâ€, â€œthe timing of the downgrade may not be apt.â€ â€œIf the downgrade had happened when others like Fitch and S&P downgraded Nigeriaâ€™s rating, it would have been understandable. At this period when it appears that some levels of progress have been made, I would have expected the ratings to be left unchanged.â€
â€œThe success or otherwise of governmentâ€™s efforts to address key structural issues is arguable. While not absolute, there is evidence that governmentâ€™s efforts in blocking revenue leakages and cutting some excessive costs (to an extent) supported the economic recovery from recession and that some focus on local substitutes prevented a prolonged period of economic recession. In addition, as pointed out by the rating agency, the FIRS was able to increase non-oil revenue by 15% in nominal terms as at September 2017 compared to 2016; which was during a contractionary period.Â
â€œThe rating agency also established that the independent re-appropriation of revenues from MDAs yielded some positive results albeit lower than projected. It should also be noted that the other sectors with potentials for revenue earnings to the government require some level of foreign investment and expertise which were not forthcoming during the period due to the heightened risks of the economic contraction and exchange rate fluctuations.Â
These developments shouldnâ€™t have resulted in a downgrade. However, since the ratings retained a stable outlook for the country, these might have been taking into account,â€ he explained
Speaking on the consequences of the downgrade, Ademola stated: â€œIt therefore follows that the real contention here is the issuer and debt ratings which will now make borrowing more expensive to the Nigerian government. The fact that the country requires a huge amount of spending on infrastructure, most of which it plans to finance through foreign loans, makes the rating a very important one.Â
â€œSo far the government has been able to attract foreign loans at a relatively good yield despite the earlier ratings downgrade by other rating agencies. Now, that all of them might have agreed on the issuer and debt downgrade, the country may not have any wiggle room left to justify a lower yield; hence we should expect more expensive loans to be obtained in 2018 and debts servicing budget to increase for 2019.â€
Although a former bank chief executive, Mr. Okechukwu Unegbu, stressed that he did not believe in assessments by rating agencies, he pointed out the Nigerian economy remained challenged.
According to Unegbu, who is currently the chief executive of Maxifund Securities Limited, Nigeriaâ€™s low human development index should be a concern to the government.
â€œEven though the World Bank Ease of Doing Business shows that we recorded some improvement, those of us who are in business know that it is not correct.
â€œYou cannot use a small segment of the population to make conclusion for a country like Nigeria that has a very large population.
â€œFor instance, if you go to Corporate Affairs Commission to make enquiries or even register a business, the time it takes is still long. So, how does that show we have improved?
â€œSo the government should forget about the rating agenciesâ€™ comments and focus on how to address unemployment and other challenges in the economy.â€
Also, CEO, Global Analytics Consulting, Tope Fasua, who said, â€œMoodyâ€™s has an established methodologyâ€, cautioned against politicising the rating by Moodyâ€™s.Â
Fasua contended that Nigeriaâ€™s debt servicing was unsustainable, stressing that, the countryâ€™s financial strength and debt profile had deteriorated. According to him, â€œWe shouldnâ€™t politicise everything and I believe Moodyâ€™s is not involved in Nigeriaâ€™s politics. With our crude oil proceeds equalling our debt servicing figures in 2018, itâ€™s obvious that we have reached a certain threshold of unsustainability. That is the point made in the Moodyâ€™s Report; that our financial strength and debt profile has â€˜materially decreasedâ€™ or worsened.â€
â€œIf we had good financial strength, we surely will not be funding our new budget with external borrowing and we would not be thinking of refinancing loans. We would prefer to pay down. We did that in 2006. Itâ€™s highly unfortunate that we are back with our begging bowls, while we have nothing on ground to show for the borrowing. There is a coalition of voices on Nigeriaâ€™s bad debt profile that the government will make a big mistake to ignore,â€ Fasua added.Â