Economy | Reviews & Outlooks

Another Ratings Downgrade from Moody’s

Feb 02, 2023   •   by   •   Source: FBNQuest   •   eye-icon 188 views

Today, we take a closer look at Moody’s Investor Service's credit rating of Nigeria’s currency. Last week, the credit agency downgraded the government’s long-term foreign currency and local-currency issuer ratings, as well as its foreign currency senior unsecured debt ratings from B3 to Caa1, and changed the country’s outlook to stable. This follows a previous review of the agency’s rating in October ’22, when it downgraded Nigeria’s local and foreign currency to B3 from B2. The latest rating downgrade is the country’s lowest since Moody's began its credit rating of the country in 2006.


According to the agency, the rating downgrade is mainly driven by expectations that the government's fiscal and debt position would continue to deteriorate.


The downgrade has significant implications, including challenges in raising commercial debt from external sources, higher pricing of the country’s debt on the international capital market, difficulty in attracting foreign capital, and potential capital flow reversals.


The agency further lowered Nigeria’s local currency and foreign currency ceilings to B2 and Caa1 respectively, previously from B1 and B3. 


Moody attributed the continuous weakening of the local currency to the non-diversification of the country's external position, as well as uncertainties around government policies.


The agency equally lowered Nigeria’s foreign currency senior unsecured MTN program rating to (P)caa1 from P(B3).  


The firm’s expectation is that the continuous strain on the government’s fiscal position due to the decline in oil production output, the lingering issue of fuel subsidies, and the elevated interest rate will likely continue over the next couple of years.      


In relation to its African peers, Nigeria’s currency rating of Caa1 compares with that of Angola, Mauritius, and Tunisia of B3, Baa3, and Caa2 respectively.  


The agency forecasts that Nigeria’s debt service payments will take up almost 50% of the government’s revenue in the medium term, up from an estimated proportion of 35% in 2022.


It also expects the country's aggregate debt-to-GDP ratio to rise to c.45% in 2023. This compares with 34% in 2022 and 19% in 2019.


The agency expressed renewed optimism about the recovery path of Nigeria’s economy under a new administration after the forthcoming general election.


However, it noted that the path to growth depends mainly on the implementation of policies that consolidate fiscal sustainability, especially by raising the level of non-oil revenue.


The agency pointed out the limited sources of revenue available to the government to fund the 2023 budget, as well as the large size of the fiscal deficit. 


It further suggested that the government will tap the domestic market to borrow funds at higher interest rates in 2023. This is in addition to borrowings via ways and means advances from the Central Bank of Nigeria.

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