Moody’s Affirms Nigeria’s Speculative Grade Ratings
Moody’s Ratings has affirmed Nigeria’s speculative or Caa1 long-term foreign currency and local currency issuer ratings and maintained its positive outlook.
The global rating agency also affirmed Nigeria’s foreign currency senior unsecured debt ratings at Caa1 and the foreign currency senior unsecured MTN program rating at (P)Caa1.
According to the rating noted, Moody’s said the positive outlook, in place since December 2023, continues to reflect the prospects for a reversal of the deterioration in Nigeria’s fiscal and external position as a result of the authorities’ reform efforts.
In particular, the country’s external rebalancing has continued to advance since the beginning of the year after further authorities’ initiatives to address the backlog of foreign exchange demand and foster a better-functioning foreign exchange market.
Moreover, monetary tightening measures have been finally introduced in the first half of the year to combat increasingly high inflation.
However inflation risk remains elevated and the fiscal outlook particularly uncertain, both key reasons underpinning the affirmation of the Caa1 ratings. Inflation, which reached 34% in May 2024, has yet to reverse, it added.
Moody’s said the sovereign nation’s tighter monetary conditions are pushing government interest rates for local currency borrowing, the main source of funding given a still-constrained external funding environment, to higher levels.
Further risks to the government’s fiscal consolidation plans come from the higher cost of oil subsidy and likely introduction of supplementary measures to support Nigerians most affected by the inflation shock, which threaten an ever-increasing interest expenses.
Nigeria’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged at B2 and Caa1, respectively, the rating note said.
It added that 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, namely oil production.
The foreign currency ceiling at Caa1 remains two notches below the local currency 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.
Moody’s said the positive outlook primarily reflects the credit positive policy steps taken in Nigeria by the authorities to support the country’s external rebalancing, fight very high inflation and strengthen the banks.
The authorities’ reforms to the foreign exchange market have started to bear fruit, supporting Nigeria’s external rebalancing. After the Central Bank of Nigeria (CBN) unified its multiple foreign exchange windows in June 2023, devaluing the naira by 37%, it introduced in January 2024 a methodological change in the calculation of the official exchange rate, causing a further de facto 38% devaluation.
Since then, the official rate has tracked the parallel rate much more closely, indicating a better functioning market.
These changes, alongside the clearance of verified foreign exchange backlog by the CBN, appear to have bolstered confidence and attracted flows back to the official market, leading to an increase in inflows captured by CBN in the first quarter of 2024 of roughly 50% versus the previous quarter.
“We expect the ongoing external adjustment to bring the overall balance of payments into positive territory from next year as import compression due to the weaker naira, foreign exchange reforms, and a higher policy rate improve net inflows of foreign currency”. The rating note stated.
The CBN has acted vigorously since February 2024 in its fight against Nigeria’s high and still-rising inflation, raising the policy interest rate by a cumulative 750bps since the beginning of the year in a series of three hikes.
In addition, the CBN reduced on 17 April 2024 the maximum loan-to-deposit ratio for deposit money banks by 15 percentage points to 50%, intending to reinforce contractionary pressure on the money supply and prices.
Moody’s said these policy changes come after a lengthy period of policy inaction by the CBN after inflation started to take off in June 2023.
On the banking sector side, the authorities have introduced several changes which, while costly in the short to medium term, will lead to a stronger sector in the long term.
The CBN has cleared the largest part of the foreign exchange backlog, removed banks’ ability to hold a positive net foreign assets position, thereby reducing vulnerability to a naira depreciation, and significantly raised the minimum capital requirements.
The affirmation of the Caa1 ratings reflects elevated risks regarding high and still-rising inflation and the particularly uncertain fiscal outlook.
“We expect that the fiscal deficit will widen significantly in 2024 to around 7% of GDP amid multiple obstacles to the government’s fiscal consolidation plans.
“Moreover, institutional weaknesses and heightened social risks as inflation affects the population with high poverty rates and restrained access to basic services are key credit constraints.
“While the new administration is working at raising the very low levels of tax compliance, higher revenue intake is unlikely to fully offset the ongoing spending pressure”.
In addition, the global rating agency explained that the tighter monetary conditions are pushing government interest rates for local currency borrowing to higher levels, from an average of 12.8% in 2023 to 19.7% between January and May 2024.
Moody’s said as the government is predominantly borrowing in domestic markets, this will have a significant impact on interest spending, which analysts expect will increase by 1 percentage of GDP in 2024 and to consume 36% of government revenue.
It said further spending pressure comes from the apparent return of significant fuel subsidies in 2024 as the naira price of gasoline imports increased with the devaluation of the currency without a concomitant increase in the price at the pump.
Additionally, it noted that N6.7 trillion supplementary budget to address additional spending needs in light of Nigeria’s high inflation is being mooted by the authorities, aimed at health, social welfare, agriculture, and energy.
Beyond 2024, the fiscal outlook is particularly uncertain, Moody’s said. It expects the boost in the naira value of oil production to feed into government accounts over 2024, though future oil production is encumbered by payments on various oil-backed loans contracted by the state-owned oil company, NNPC, limiting the extent to which government revenues will benefit.
Meanwhile, fuel subsidy spending will likely remain substantial, if gradually decreasing.
Reforms to revenue collection undertaken by the authorities will likely boost non-oil revenue somewhat over the coming years, but they will remain low.
“Our base case is an improvement in the fiscal deficit versus 2024 by 0.5 percentage of GDP in 2025. However, with inflation yet to reverse, a low but important risk remains that higher government borrowing costs and further social spending pressures give rise to a loss of market confidence, impairing liquidity as interest rates spiral”, Moody’s said. FG Approves N21bn for Purchase of Meters-NERC
