Moody’s Investors Service (“Moody’s”) has downgraded the Government of Nigeria’s long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable.
Moody’s has also downgraded Nigeria’s foreign currency senior unsecured MTN program rating to (P)Caa1 from (P)B3.
Today’s rating action concludes the review for downgrade initiated on 21 October 2022.
Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate is the main driver behind the rating downgrade. The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.
Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates has intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items.
The 2023 budget plans on an even larger fiscal deficit than in 2022, while the government’s funding options remain narrow and reliant on central bank financing. In addition, the government’s lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, thereby eroding further Nigeria’s external profile over time.
At this stage, immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction that would raise the default risk.
The outlook is stable. While a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for 25 February 2023 and thereby support fiscal consolidation, implementation will likely remain lengthy amid marked social and institutional constraints. Indeed, the government has long-held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially and politically challenging to carry through. Meanwhile, funding conditions are likely to remain tight.
Moody’s has also lowered Nigeria’s local currency (LC) and foreign currency (FC) country ceilings to B2 and Caa1 respectively, from B1 and B3 respectively. 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. The FC country ceiling at Caa1 remains two notches below the LC country 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.
Rationale for the Downgrade to Caa1
The review for downgrade focused on Nigeria’s fiscal and external position and the capacity of the government to address the ongoing deterioration – other than by alleviating the burden of its debt through any form of default, including debt exchanges or buy-backs.
Deterioration In Fiscal And Debt Position Likely To Continue
Fiscal pressure from falling oil production, the increasingly costly oil subsidy as well as rising interest rates will likely persist over the next couple of years, while a policy response post-election is likely to take some time to put Nigeria’s fiscal position on a more sustainable path. As a result, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt increasingly coming at odds with other spending priorities. Under its baseline scenario, the rating agency projects that interest payments will consume about half of general government revenue over the medium term, up from an estimated share of 35% in 2022 and that general government debt-to-GDP will continue rising to about 45%, up from 34% in 2022 and 19% in 2019.
The oil production outlook as well as the securitization of past advances from the Central Bank of Nigeria (CBN) both remain uncertain. In particular, the securitization would bring a degree of fiscal relief but its lawfulness is being contested in Parliament and its passage uncertain. As a result, fiscal consolidation primarily hinges on raising the level of non-oil revenue, which at the general government level has so far bounced back to levels last witnessed in 2014 after successive shocks. However, boosting non-oil receipts beyond this recovery level will likely be incremental. Moody’s baseline scenario is that the government will phase out the oil subsidy only very gradually, and replace it by a more targeted and less costly social transfer.
Nigeria’s institutional capacity to design and implement a fiscal consolidation strategy remains very weak. While the general election scheduled for 25 February 2023 may result in a new political leadership with renewed willingness and sufficient political capital to tackle fiscal issues, weak institutional capacity and vested interests suggest that implementation will be lengthy. Moreover, Nigeria’s social context and complex societal set-up add further difficulties to delivering on fiscal reforms. Nigeria’s indicators measuring governance and social outcomes are particularly weak; data and assessment on key policy issues lacking.
Government funding options are constrained, suggesting that the government will borrow at higher interest rates in 2023 at least and with heavy reliance on domestic debt, including continuing borrowing from the CBN. The financial sector remains underdeveloped relative to many of Moody’s rated sovereigns globally, with the banking sector representing the main segment (36% of GDP in assets) and carrying already large on-balance sheet exposure to the government and the CBN (42% based on Moody’s-rated banks).
Nigeria’s External Profile Likely to Erode
Depressed and uncertain oil production, capital outflows amid flight to quality and the government’s constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023. The external position is more controllable for the authorities, but the continuation of CBN’s management of foreign exchange through restricted quantity of supply risks exacerbating external pressure over time. Moody’s expects that the authorities will allow the foreign exchange rate to continue to adjust at an only very gradual pace.
Constraints on external funding come at a time when the government’s external debt service in foreign currency is contained, thereby limiting immediate liquidity risks. Over the medium term, however, the external liquidity profile will likely erode unless the government can improve its access to external borrowing sources. This, in turn, will rely on the ability of the government to demonstrate a track record of delivering on fiscal reforms.
Rationale for the Stable Outlook
The outlook is stable, balancing the potential for a renewed reform impetus post-election against persisting fiscal pressure and lengthy policy implementation amid marked socio-political constraints. It will likely take time for the new President to form a government and establish its policy agenda, and eventually start reversing the ongoing fiscal deterioration.
The capacity of the government to reduce its fiscal deficit in the shorter term is limited, but the debt amortization profile remains favorable for now, providing a time-window for the government to consolidate its fiscal position and foster confidence. During that timeframe, the government’s past and more recent efforts to raise non-oil revenue may yield more tangible results. On the other hand, should the government fail to deliver on fiscal consolidation, the government will devote an increasing share of its revenue to paying interest, potentially to the point where a debt restructuring is required to lower the burden on the budget.
Environmental, Social, Governance Considerations
Nigeria’s ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to environmental risk and social risk and very weak governance that, with low wealth levels, leads to low resilience to E and S risks.
For Nigeria, exposure to environmental risks carries very high credit risks, reflected in its E-5 issuer profile score. Exposure to carbon transition risk is very high, given the very significant reliance on oil for the public sector and the economy as foreign exchange earnings from oil represent 80% of merchandise exports. Nigeria’s credit profile would face downward pressure in a scenario of more rapid global carbon transition than Moody’s currently assumes and that implied by stated policies internationally. Water risk and physical climate risk are also high, driven by the high share of the population exposed to unsafe drinking water, risks of flooding and heath stress, as well as risks from waste and pollution respectively.
Exposure to social risks is very highly negative (S-5 issuer profile score), mainly related to poverty, low education outcomes, and poor health and safety indicators and access to basic services. Infant mortality is one of the highest in Sub-Saharan Africa and poverty is widespread, with close to 40% of the population living on less than PPP$1.90 a day despite vast natural resources wealth. While its demographic is favorable, very weak education outcomes mean that the country fails to benefit from this potential. The successive oil shocks and the pandemic have exacerbated the exposure to social risk. GDP per capita remains well below 2015 figures, with growing inequality due to the most vulnerable households carrying a disproportionate part of the burden of successive shocks.
Nigeria has a very highly negative governance profile score (G-5 issuer profile), reflecting weak control of corruption and rule of law as well as very weak fiscal and monetary policy effectiveness and opaque management of public resources. Management of oil revenue is particularly weak; absent fiscal stabilizers, the government runs pro-cyclical policy or worse fails to take advantage of high international oil prices as illustrated in 2022. Weak data reporting is also a key credit constraint, impairing policy assessment and decision making.
By virtue of the ratings having been on review for downgrade, the conclusion of the review deviates from the previously scheduled dates announced in the EU Sovereign Release Calendar.
GDP per capita (PPP basis, US$): 5,459 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 15.6% (2021)
Gen. Gov. Financial Balance/GDP: -6% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.4% (2021) (also known as External Balance)
External debt/GDP: 17.9% (2021)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 25 January 2023, a rating committee was called to discuss the rating of the Nigeria, Government of. The main points raised during the discussion were: The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.
Factors That Could Lead to an Upgrade or Downgrade of the Ratings
Renewed impetus and tangible reform implementation would exert upward pressure on the rating. In particular, indications that the subsidy reform is being implemented, the non-oil revenue improving at a faster pace than nominal GDP and that the oil production outlook is brightening would signal that the fiscal deterioration is reversing course.
Conversely, signs that the government faces increased difficulty in accessing necessary borrowings at manageable costs would exert downward pressure on the rating. In particular, much higher interest rates on government new borrowings or a wider primary deficit (than currently foreseen by Moody’s) would signal increased liquidity pressure, as would a deeper fall in foreign exchange reserves.
Ultimately that would indicate that a debt restructuring may become the sole means for the government to alleviate the burden from debt service.