Moody’s downgrades Nigeria’s currency and debts ratings to Caa1, cites Ways and Means

Moody’s Investors Service (“Moody’s”) yesterday downgraded the Government of 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.

Just last October, Moody’s downgraded Nigeria’s local and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2 and placed them on review for downgrade.

This rating concludes the review that started last October.

Moody’s has also downgraded Nigeria’s foreign currency senior unsecured MTN program rating to (P) Caa1 from (P) B3. Yesterday’s rating action concludes the review for the downgrade initiated on 21 October 2022. 

Rating details

The review says Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate is the main driver behind the rating downgrade.

A rating downgrade is a message to foreign investors that the country’s current bonds (debts) and its potential to take on more debt are at risk, making it more expensive to borrow.

Nigeria faces wide-ranging fiscal pressure while the capacity to respond remains constrained by the government’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,” the review said. 

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

• 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.
• 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 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. 

Rating rationale: 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. 

Deterioration in fiscal and debt position likely to continue: According to the review, 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, while a policy response post-election 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% in 2022 and that general government debt-to-GDP will continue rising to about 45%, up from 34% in 2022 and 19% in 2019.
• Moody’s also cited the Ways and Means loan extended by the central bank to the government as a major challenge facing the next government.

There is currently no legal framework for the loan as the level of overdraft given to the government is also in breach of the provisions. To get this loan repaid on time, the government will need to securitize it, a move that needs the backing of the national assembly.

• “The oil production outlook as well as the securitization of past advances from CBN remains uncertain. In particular, the securitization would bring a degree of fiscal relief but its lawfulness is being contested in the National Assembly, 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 by a more targeted and less costly social transfer.”
• “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 set-up add further difficulties to delivering on fiscal reforms. Nigeria’s indicators measuring governance and social outcomes are particularly weak; data and assessment on key policy issues lacking. 
• “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. The financial sector remains underdeveloped relative to many of Moody’s rated sovereigns globally, with the banking sector representing the main segment (36% of GDP in assets) and carrying already large on-balance sheet exposure to the government and the CBN (42% based on Moody’s-rated banks),” it said.