Analysts: Moody’s Downgrade Not Alarming

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Kunle Aderinokun and Obinna Chima

Following the downgrade of the Government of Nigeria’s long-term issuer and senior unsecured debt rating to B2 from B1 by Moody’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. 

Moody’s, which also downgraded the  senior unsecured MTN programme rating and the provisional senior unsecured debt rating to (P)B2 from (P)B1, attributed the downgrade  to “The authorities’ 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. 

It added that, “As a consequence, while debt levels remain contained and notwithstanding recent cyclical improvements, the government’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.”

Moody’s explained that, “The stable outlook reflects the fact that the likelihood of a shock occurring that would further impair Nigeria’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.”

The government, in its reaction, argued that the downgrade was inappropriate because it had initiated reforms  within the last two years to turn around the economy, in addition to  its plan to raise N710 billion ($2 billion) this year from the restructuring of the government’s equity in the joint venture oil assets, as highlighted in the 2018 budget.

According to the government,  “The 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.” 

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 Moody’s to make this decision, “we strongly disagree with the premise and must address some of the conclusions upon which the decision rests”.

“This is equivalent to Nigeria’s existing B/Stable Outlook rating from S&P and slightly lower than Nigeria’s B+/Negative Outlook rating from Fitch.” 

According to the federal government, since Nigeria was last rated by Moody’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, “The downgrading is unfortunate but not worrisome.”

“The 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,” he added.

Ekpo believed, “ 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.”

The Nigerian economy, he said,  was “large enough such that proper management of its resources for the common good would make a mockery of ratings by certain agencies.”

Similarly, CEO, The CFG Advisory Ltd, Adetilewa Adebajo, said unfortunately Nigeria moved  steps forward on ease of doing business and steps backward on ratings. Adebajo explained that the issues were around “revenue generation shortfalls and sustainable debt service capabilities.” While noting that, “This net effect is the increased cost of our offshore borrowings,” he believed “the situation will not affect our capacity to access capital from the Eurobond markets.” 

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, “The 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.”

Acknowledging that, “The 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,” Akpata said  “None of these are particularly new problems.”

“I would have expected Moody’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,” he argued. 

“Market reaction to the Moody’s downgrade is likely to be muted given some of the reasons mentioned above,” he added.

Ecobank Nigeria Analyst, Kunle Ezun,  also faulted the decision by Moody’s, saying “from every indication Nigeria shouldn’t be downgraded.”

He explained: “The business environment is looking positive. So with the improvement in the forex market and slowdown in inflation, one would begin to question Moody’s consideration.”

In his own analysis, Executive Director, BGL Capital Ltd, Femi Ademola, while acknowledging that, the downgrade of Nigeria’s issuer and debt ratings by Moody’s  was premised on the government’s unsuccessful efforts at addressing key structural weakness exposed by oil price shock by broadening non-oil revenue base, cautioned  that “the economy remains structurally exposed to further economic and financial shocks.”

Although, Ademola said  the reasons were “very correct”, “the timing of the downgrade may not be apt.” “If the downgrade had happened when others like Fitch and S&P downgraded Nigeria’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.”

“The success or otherwise of government’s efforts to address key structural issues is arguable. While not absolute, there is evidence that government’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. 

“The 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. 

These developments shouldn’t have resulted in a downgrade. However, since the ratings retained a stable outlook for the country, these might have been taking into account,” he explained

Speaking on the consequences of the downgrade, Ademola stated: “It 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. 

“So 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.”

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, Nigeria’s low human development index should be a concern to the government.

“Even 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.

“You cannot use a small segment of the population to make conclusion for a country like Nigeria that has a very large population.

“For 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?

“So the government should forget about the rating agencies’ comments and focus on how to address unemployment and other challenges in the economy.”

Also, CEO, Global Analytics Consulting, Tope Fasua, who said, “Moody’s has an established methodology”, cautioned against politicising the rating by Moody’s. 

Fasua contended that Nigeria’s debt servicing was unsustainable, stressing that, the country’s financial strength and debt profile had deteriorated. According to him, “We shouldn’t politicise everything and I believe Moody’s is not involved in Nigeria’s politics. With our crude oil proceeds equalling our debt servicing figures in 2018, it’s obvious that we have reached a certain threshold of unsustainability. That is the point made in the Moody’s Report; that our financial strength and debt profile has ‘materially decreased’ or worsened.”

“If 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. It’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 Nigeria’s bad debt profile that the government will make a big mistake to ignore,” Fasua added.