Affirms B2 outlook
International Investors Service rating agency, Moody’s, last Thursday unsurprisingly gave Nigeria a negative rating from the previous stable ratings, even as it has affirmed the country a B2 outlook.
The negative outlook reflects Moody’s view of increasing risks to the government’s fiscal strength and external position.
With consistent weak government finances and no hope of increased revenue from crude oil sales, the country’s financial position is expected to attract negative ratings from international rating agencies.
Moody’s decision to affirm the rating at B2 recognizes a combination of credit strengths including the country’s large and diversified economy supported by vast oil and gas endowments, notwithstanding its persistent credit weaknesses such as its very weak institutions and governance framework and in particular poor public finance management.
Moody’s has maintained Nigeria’s country risk ceilings at their current levels of foreign currency bond ceiling at B1, foreign currency deposit ceiling at B3, and local currency bond and deposit ceilings at Ba1.
The implication of the negative rating for the country is that it serves as a warning to creditors, who are advised to be cautious in dealing with Nigeria.
One key element in the country’s negative rating is the high debt service ratio to GDP. The country’s external debt hit an all time high of N2.7 trillion or 27 per cent of the total N10.7 trillion 2020 Federal Government Budget.
A likely consequence of the country’s fragile finance base is a risk that the government may resort to increasingly opaque and costly options to finance a rising debt burden. There is equally building vulnerability to an adverse change in capital flows in light of Nigeria’s increasing reliance on foreign investors to fund the country’s foreign exchange reserves.
Moody’s change of outlook to negative is informed by the increasing fragility of the country’s public finances and sluggish growth prospects.
The increasing fragility of Nigeria’s public finances is evident in the greater reliance by the government on financing from the Central Bank of Nigeria (CBN) over the last three years to cover persistently large fiscal deficits, with CBN cash advances reaching 2.5 per cent of GDP on a net basis at the end of September 2019, in addition to government debt instruments held by the CBN worth 1.4 per cent of GDP.
Moody’s expects general government revenues to remain very low at around 8 per cent of GDP until 2022, despite measures such as the VAT rate increase to 7.5 per cent from 5 per cent in 2020.
It said debt affordability will remain weak, with general government interest payments at around 25 per cent of revenues in the next few years.
Moody’s expects real growth to remain weak, at just over 2 per cent over the next few years.