Moody’s Upgrades Nigeria’s Ratings, Changes Outlook to Stable
Moody’s Ratings has upgraded the Government of Nigeria’s long-term foreign currency and local currency issuer ratings to B3 from Caa1 and changed the outlook to stable from positive.
In a rating note released, Moody’s analysts said they have also upgraded Nigeria’s foreign currency senior unsecured debt ratings to B3 and the foreign currency senior unsecured MTN program rating to (P)B3 from Caa1 and (P)Caa1, respectively.
According to the rating note, the upgrade reflects significant improvements in Nigeria’s external and fiscal positions, noting that a more flexible exchange rate has greatly bolstered external reserves.
Concurrently, Moody’s analysts said the removal of oil subsidies has alleviated budgetary spending pressures. Initially, these policy shifts posed inflationary risks, with, as a result, a potential for policy reversal.
These risks have now diminished, with inflation and domestic borrowing costs showing nascent signs of easing, giving us confidence that the policy changes are becoming more entrenched, the rating note said.
Additionally, analysts highlighted that tax reforms have started yielding results; although vulnerabilities related to oil prices and the exchange rate remain, Nigeria’s more robust buffers support a B3 rating.
“The stable outlook means we expect Nigeria’s recent progress on external and fiscal fronts to continue, though at a slower pace if oil prices fall”, Moody’s said. Moody’s analysts assume current policies—like the flexible exchange rate—will stay in place, supported by a healthy balance of payments.
Over the next few years, Moody’s analysts said they expect debt to level off at 50% of GDP, with interest payments taking up about 35% of government revenue.
“Risks are balanced, with the Central Bank of Nigeria (CBN) potentially facing difficulties in upholding a flexible exchange rate if oil prices decline further, weakening the naira and increasing the government debt burden.
“Persistent high inflation could impede interest rate normalization. Conversely, a track-record of flexible exchange rate policy and successful revenue reforms could improve business sentiment, lower interest rates, and drive economic growth beyond our baseline expectations”, the rating note stated.
Nigeria’s local currency and foreign currency country ceilings were raised to Ba3 and B2, respectively, from previously B2 and Caa1.
The local currency country ceiling at Ba3 is three notches above the sovereign issuer rating, incorporating some degree, albeit reduced, of unpredictability in government actions and political risk.
Moody’s said the FC country ceiling at B2 remains two notches below the LC country ceiling, reflecting persistent transfer and convertibility risks.
Explaining the rationale for the ratings, Moody’s said the recent overhaul of Nigeria’s foreign exchange management framework, which eliminated multiple foreign exchange rate windows and established a unified forex market, has markedly improved the balance of payments and bolstered the CBN’s foreign exchange reserves.
“This reform has also strengthened the non-oil segment of the balance of payments, thereby reducing Nigeria’s vulnerability to declining oil prices. Although under our baseline assumption oil prices will decline by 16% in 2025, this will moderate the positive dynamics but will not reverse it.
“The forex market reforms have yielded two major benefits: first, the naira is now more accurately priced by the market, correcting its previous overvaluation and facilitating significant external rebalancing”.
Moody’s said there is now a more efficient distribution of forex liquidity within the economy and CBN reserves – interventions in the forex market have primarily aimed at smoothing currency adjustments.
The gap between official and parallel market rates has narrowed to almost disappear. It noted that the CBN has enhanced its reserve buffers primarily by repaying external liabilities rather than accumulating gross reserves.
By the end of 2024, net reserves had increased to $23 billion from $8 billion two years earlier. Gross reserves covered seven months of imports and 283% of external debt payments at the end of 2024.
The government’s efforts to reduce fiscal deficits are yielding positive outcomes. Fiscal consolidation is primarily driven by the elimination of the oil subsidy in mid-2023 and improved tax collection efforts.
These savings, coupled with the boost to revenue from naira depreciation, have been partially redirected towards capital expenditures and social spending. Ultimately, the primary balance shifted to a surplus of 0.8% of GDP in 2024, compared to a deficit of 2.6% in 2022.
“We anticipate a stable primary surplus for 2025, followed by a modest annual decline in 2026 and 2027, driven by increased spending pressures as elections approach.
“While lower oil prices in 2025 will affect revenue, we expect this effect to be offset by the cessation of the Nigerian National Oil Company’s (NNPC Limited) practice of withholding government oil revenue to recover past oil subsidy costs.
“These costs were, in the past, occasionally not transferred to the government, ultimately being borne by the company. We project that the fiscal deficit will widen to 4.7% in 2025 due to higher interest payments, before stabilizing in 2026-2027 as interest payments start to decline, offsetting the rise in spending expected ahead of the elections.
“Government debt burden is likely to stabilize around 50%, but the interest-to-revenue ratio will remain weak, forecast at 35% by 2027”, Moody’s said.
Nigeria’s high inflation reflects chronic macroeconomic imbalances and the side effects of the corrective policy measures taken over the last two years. Inflation has therefore been slow to temper, but signs of easing have now emerged.
A significant update to the Consumer Price Index basket weights, the first since 2009, occurred at the end of 2024, bringing the inflation rate to 24.5% in January from 34.8% in December 2024, complicating long-term trend analysis.
Nonetheless, a slight decline in inflation since January indicates underlying pressures are easing. Food price inflation, a major driver of overall inflation and social risks, shows a clearer downward trend, falling for three consecutive months from 26.1% in January to 21.3% in April.
Social risks peaked in the summer of 2024 with widespread protests over living costs. While risks persist, especially if the naira depreciates further amid falling oil prices, the pass through to inflation has been reduced alongside the external rebalancing.
The CBN’s policy has been tight, with easing likely to be very gradual. A cumulative 875 basis point increase in 2024 raised the policy rate to 27.5%, resulting in a positive real policy rate for the first time since 2020.
Additionally, the CBN has tightened the money supply through higher banks’ cash reserve requirements. The cessation of CBN advances to the government and the recent naira’s stabilization have also alleviated inflationary pressure.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects our expectations that external and fiscal improvements will decelerate but will not reverse entirely.
“We foresee broad policy continuity, with the CBN maintaining its current foreign exchange regime amid a positive albeit weaker balance of payments due to lower oil prices, and the fiscal authority’s efforts to enhance non-oil revenue.
“We project a stable government debt burden even when assuming a gradual drift of the naira to the US dollar and incorporate the fiscal effect of the electoral cycle.
On the downside, a further decline in oil prices could challenge the CBN’s commitment to its current foreign exchange regime.
Depending on the policy response, this could result in a sharp depreciation of the naira, leading to a challenging-to-reverse increase in government debt and a decrease in foreign exchange reserves.
Persistent inflation also poses a downside risk, potentially halting the gradual normalization of interest rates. A more adaptable balance of payments and government revenue reforms present upside risks.
“Although we do not anticipate further increases in non-oil revenue to GDP under our baseline, the continuation of current policies could further fuel a self-reinforcing positive feedback loop between stronger business and investor sentiment, lower interest rates and higher economic growth”.
Moody’s said the revision of the sharing agreement of oil revenue with NNPC to the favour of the government poses additional upside risks. #Moody’s Upgrades Nigeria’s Ratings, Changes Outlook to Stable
