Nigeria: Moody's Affirms Nigeria's 'B2' Ratings, Negative Outlook

(file photo).
17 April 2020

Moody's Investors Service yesterday affirmed Nigeria's 'B2' long-term issuer ratings and senior unsecured rating, its '(P)B2' senior unsecured programme rating and maintained its negative outlook on Nigeria.

The global rating agency explained in a statement that the negative outlook reflected the material downside risks to Nigeria's credit worthiness identified when the outlook on the country's rating was changed to negative in December 2019.

However, it noted that risks in the country have increased since then, exacerbated by the oil price shock and the financial and economic implications of the COVID-19 outbreak.

According to Moody's, the rapid and widening spread of the outbreak and related price shocks were creating an unprecedented credit shock across a wide range of regions and markets.

"For Nigeria, these shocks amplify existing credit vulnerabilities both over the immediate and longer term. In the near term, the significant drop in oil revenues will reduce an already extremely low tax base, undermining fiscal strength.

"Combined with possible capital outflows, pressure on the fragile balance of payments may intensify, threatening external stability. "In the longer term, the impact of the coronavirus on growth, particularly in the large informal sector, may weaken economic strength.

The sovereign'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, while the negative outlook also encompasses longer-term challenges, downward pressure may materialise relatively early on in the outlook horizon," it added.

The agency stated that its affirmation of Nigeria's B2 ratings also took into account the government's relatively low debt burden in relation to Gross Domestic Product (GDP), 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.

These credit features, according to Moody's, lowered the probability of imminent and severe liquidity or balance of payments stresses relative to some 'B'-rated peers.

But Nigeria's country risk ceilings remained unchanged at their current levels: the foreign-currency bond ceiling at B1, the foreign-currency deposit ceiling at B3, and the local-currency bond and deposit ceilings at Ba1.

"As a result of the oil price fall in the face of depressed oil demand and a slow supply response, Moody's now assumes that oil prices will average $40-$45 per barrel in 2020, and $50-$55 by 2021, around $20 and $10 below previous expectations in each year.

"Risks to that forecast are firmly to the downside. Beyond 2021, Moody's currently assumes that oil prices will return in a medium-term range of $50-$70 per barrel, as demand recovers and supply adjusts further," it added.

As a large oil exporter, Nigeria heavily relies on the oil sector which accounts for around 50 per cent of government revenues and more than 80 per cent of merchandise exports proceeds.

Lower oil prices in the next two years, according to the rating agency, would weaken Nigeria's credit profile by negatively affecting the government's public finances and the country's external position, exacerbating the near- and longer-term downside risks to the B2 rating already identified when its outlook on the country's rating was changed to negative in December 2019.

It noted that while the fiscal and external implications of the COVID-19 outbreak manifest immediately, in the current environment, the downside risks to Nigeria's rating also relates to the longer-term implications for the sovereign's economic strength, should the economy not recover fully once the epidemic subsides.

"Nigeria's public finances are increasingly fragile. Given the already extremely low government revenue base (at around eight per cent of GDP pre-shock), the significant loss of oil-related fiscal revenue will exacerbate the persistent (at around eight per cent of GDP pre-shock), the significant loss of oil-related fiscal revenue will exacerbate the persistent fiscal deficits and raise the debt burden," it stated.

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