Sanctions Heighten Default Risk, Economic Stress in Niger – Moody's

Sanctions Heighten Default Risk, Economic Stress in Niger – Moody’s

The Economic Community of West African States (ECOWAS) imposed economic and financial sanctions on the Government of Niger after soldiers of Niger’s presidential guard detained President Mohamed Bazoum at his home and announced a coup d’etat on 26 July.

Moody’s said these sanctions and more to come would heighten Niger’s risk of debt default and trigger economic stress for the country.

The ECOWAS sanctions include freezing Niger’s assets held by commercial banks and ECOWAS central banks and the suspension of all commercial and financial transactions between their member states and Niger.

If the sanctions are maintained, they will likely prevent Niger from making upcoming principal or interest payments primarily to creditors outside the country, which would constitute a default under Moody’s definition of default.

The elevated risk of default prompted a two-notch downgrade of Niger’s rating on 2 August, Moody’s said. The sanctions are similar to the sanctions ECOWAS imposed on Mali in January 2022, which prevented the Malian government from fulfilling debt payment obligations to foreign creditors and resulted in a default in February 2022.

Mali missed a series of payments until sanctions were lifted later in the year, albeit with relatively modest losses to investors after principal and interest payments resumed and late payments were cured.

The risk of Niger defaulting, and the extent to which creditors incur losses, will depend on how long sanctions remain in place. Liquidity risks are particularly acute in the regional local currency market which accounts for 35% of Niger’s total outstanding debt stock.

The relatively short maturity of local-currency debt at about 4.5 years generates large refinancing needs, as compared to the longer tenor of external debt.

As a whole, Moody’s estimates Niger’s gross financing needs at about 14% of GDP in 2023 and 2024, with local currency debt instrument refinancing accounting for 7%-9% of GDP annually, external debt refinancing for 1%-2% of GDP and a primary deficit at 4.1% of GDP in 2023 and 2.5% in 2024

Reflecting the heightened liquidity risk, the West African Economic Monetary Union (WAEMU) central bank, the Banque Centrale des États de l’Afrique de l’Ouest (the BCEAO), cancelled Niger’s previously scheduled 31 July issuance of a cumulative West African franc (CFA) 30 billion in six months, one-year and three-year issuances of CFA 10 billion each because of the sanctions adopted the day before.

A similar package of issuances with the same tenors and amounts is scheduled for 17 August, cancellation of which would further exacerbate Niger’s refinancing risks.

Niger’s local currency debt service schedule indicates that, following two interest payments of CFA 1.09 billion and CFA 1.25 billion on 29 July, the next principal payment of FCFA 12 billion is due on 11 August, followed by CFA 21.5 billion due on 8 September, FCFA 21 billion due on 15 September and FCFA 27 billion due 29 September.

Moody’s said around 80% of Niger’s outstanding local currency debt is held in other WAEMU member countries, with the greatest percentages in Cote d’Ivoire (Ba3 positive) and Burkina Faso.

Niger has benefited significantly from fiscal grants of about 5-5.5 percentage points of GDP annually to enhance the government’s subdued domestic revenue generation capacity at 10%-11% of GDP. Concessional loans, meanwhile, amount to 3.5%-4% of GDP annually in 2023 and 2024, providing financing support for the fiscal deficit. With respect to external debt, more than 50% of Niger’s total debt stock is owed to multilateral creditors, while bilateral debt holders account for 8% and external commercial creditors account for 3%.

Consequently, a protracted withdrawal of investment and budget support would exacerbate government liquidity risk and weigh on Niger’s fiscal strength.  Shortly after Niger’s coup, international donors like France and the European Union suspended their financial support and security cooperation commitments, and the US and the African Union threatened to follow suit if constitutional order is not reinstated soon.

More broadly, ECOWAS sanctions will immediately and adversely affect Niger’s landlocked economy.

The country’s projected trend growth at almost 7% in 2018-27 is subject to significant downside risks following the closure of borders with ECOWAS members, especially with Nigeria and Benin.

The curtailment of electricity imports from Nigeria, where Niger sources about 70% of its electricity consumption, will additionally constrain economic growth. Trade stoppage has already resulted in major power cuts in several Nigerien cities.

Similarly, analysts believe the expected opening of the oil pipeline to Benin, which would allow Niger to boost its oil production fivefold to over 100,000 barrels per day (bpd) scheduled for late 2023 from currently 20,000 bpd, is now at risk because of financing and security concerns.

The implementation of other key infrastructure projects benefiting from external financing, including in the electricity and uranium sectors under the 2022-26 Economic and Social Development Plan, will face setbacks given their reliance on external investment support, Moody’s said. 

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