Moody’s Investors Service left Nigeria’s credit ratings unchanged at B2 with a negative outlook, Thursday, opting to hold off on a downgrade to the surprise of some analysts.
The other members of the widely acclaimed “big three”, Standard and Poor’s and Fitch, have slapped Nigeria with downgrades over the past month over the continued decline in crude oil prices which could see Africa’s largest oil producer lose more than a third of its revenues this year and the impact of the coronavirus pandemic on economic growth. Sovereign credit rating downgrades increase the cost of borrowing not only for the government but for corporates.
“Our negative outlook continues to reflect the material downside risks to Nigeria’s creditworthiness identified when the outlook on the sovereign’s rating was changed to negative in December 2019,” said Samar Maziad, a vice president at Moody’s.
“However, those risks have increased since then, exacerbated by the oil price shock and the financial and economic implications of the coronavirus outbreak,” Maziad added.
Although Nigeria dodged a downgrade from Moody’s this time, the verdict of the ratings agency is unlikely to inspire confidence in an economy tipped to contract by as much as 3.4 percent this year by the International Monetary Fund (IMF), according to analysts.
Nigeria has applied for bailout funds of about $6.9 billion from the IMF, World Bank and Africa Development Bank in the past week, as the rapid and widening spread of the coronavirus outbreak and related price shocks create an unprecedented credit shock across a wide range of regions and markets.
For Nigeria, these shocks amplify existing credit vulnerabilities over both the immediate and longer term, according to Moody’s.
“In the near term, the significant drop in oil revenues will reduce an already extremely low tax base, undermining fiscal strength,” Maziad said.
Combined with possible capital outflows, pressure on the fragile balance of payments may intensify, threatening external stability, according to Maziad.
Nigeria could be needing as much as $9bn to plug a gaping hole in its balance of payment this year, the biggest imbalance in at least seven years, according to estimates from local consulting firm, Agusto & Co.
That would be the largest outflow from the country’s external reserves since at least 2014 and could set the stage for a big currency devaluation.
In the longer term, Moody’s said the impact of the coronavirus on growth, particularly in the large informal sector, may weaken economic strength.
What’s worse, according to the ratings agency, is that the country’s “very low institutions and governance strength is likely to constrain the effectiveness of government measures to buffer the impact of the economic and financial shock”.
“The risk of such stresses materialising is rising, and while the negative outlook also encompasses longer-term challenges, downward pressure may materialise relatively early on in the outlook horizon,” Moody’s said.
While not Moody’s current expectation, indications that the government was contemplating participation in broader debt relief initiatives with negative consequences for private sector creditors would be negative for the rating.
Set against Nigeria’s rising economic pressures, Moody’s affirmation of its B2 ratings also takes into account the government’s relatively low debt burden in relation to GDP and commensurately low annual borrowing requirements, its low external debt service needs over the next few years and the capacity of the large banking sector to absorb more government debt.