Moody’s Lowers Nigeria’s Ratings over Revenue, Debt Crises, Projects Stable Outlook for Economy

Kunle Aderinokun

Moody’s Investors Service has said it downgraded Nigeria over deteriorating fiscal and debt crises.
It, however, projected a stable outlook for the country’s economy.  
Moody’s, one of the world’s leading rating agencies, disclosed this in its latest report released at the weekend.
The agency downgraded Nigeria’s long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt ratings and changed the outlook to stable.

It also downgraded Nigeria’s foreign currency senior unsecured MTN programme rating.
According to Moody’s, the latest rating action concluded the review for downgrade initiated on 21 October 2022.
Moody’s said its expectation that the government’s fiscal and debt position would continue to deteriorate was the main driver behind the rating downgrade. According to Moody’s, the government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.

It added: “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 have intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items.”
Moody’s noted that the 2023 budget is based on an even larger fiscal deficit than in 2022, adding that the government’s funding options remain narrow and reliant on central bank financing.

The report also pointed out that 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 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,” it explained.

Moody’s, however, said the outlook is stable.
“While a new administration could reinvigorate the reform impetus in Nigeria after the general election planned for February 25, 2023, and thereby support fiscal consolidation, implementation will 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,” he explained.

Moody’s also lowered Nigeria’s local currency (LC) and foreign currency (FC) country ceilings to B2 and Caa1 respectively, from B1 and B3.
“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 are given the track record of imposition of capital controls in times of low oil prices or falling oil production,” the report added.

On the rationale for the downgrade, Moody’s Investor Services explained that the review for the 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 noted that fiscal pressure from falling oil production, the increasingly costly oil subsidy as well as rising interest rates will likely persist over the next couple of years.
According to Moody’s, a post-election policy response is likely to take some time to put Nigeria’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 per cent in 2022 and that general government debt-to-GDP will continue rising to about 45 per cent, up from 34 per cent in 2022 and 19 per cent in 2019,” the report said.

The report argued that the crude oil production outlook as well as the securitisation of past advances from the Central Bank of Nigeria (CBN) remains uncertain.
“In particular, the securitisation would bring a degree of fiscal relief but its lawfulness is being contested in Parliament and its passage is uncertain. As a result, fiscal consolidation primarily hinges on raising the level of non-oil revenue, which at the general government level has so far bounced back to levels last witnessed in 2014 after successive shocks. However, boosting non-oil receipts beyond this recovery level will likely be incremental. Moody’s baseline scenario is that the government will phase out the oil subsidy only very gradually, and replace it with a more targeted and less costly social transfer,” it added.

The report insisted that Nigeria’s institutional capacity to design and implement a fiscal consolidation strategy remains very weak.
“While the general election scheduled for 25 February 2023 may result in a new political leadership with renewed willingness and sufficient political capital to tackle fiscal issues, weak institutional capacity and vested interests suggest that implementation will be lengthy. Moreover, Nigeria’s social context and complex societal setup add further difficulties to delivering fiscal reforms. Nigeria’s indicators measuring governance and social outcomes are particularly weak; data and assessment on key policy issues lacking,” the report added.

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