Moody’s Downgrades Nigeria’s Sovereign Issuer Rating to ‘B1’

Obinna Chima

Moody’s Investors Service has downgraded Nigeria’s long-term issuer ratings to B1 from Ba3 and has assigned a stable outlook, concluding the review for the downgrade that was initiated on March 4th 2016.

The key drivers of the rating action were increased external vulnerability brought about by the prospect of lower-for-longer oil prices; execution risk in the transition to a less oil-dependent federal budget, and the implications for the government’s balance sheet should it not achieve its aims; and an elevated interest burden over the next two years while the government grows its non-oil tax receipts.

According to a statement, the stable outlook reflects the fact that Nigeria’s credit fundamentals will continue to compare favorably with peers at the B1 level, despite the likely further deterioration in the country’s credit metrics due to the oil price shock.

Concurrently, Moody’s lowered Nigeria’s long-term foreign-currency bond ceiling to Ba3 from Ba2, the long-term foreign-currency deposit ceiling to B2 from B1, and the long-term local-currency bond and deposit ceilings to Ba1 from Baa3.

“The first driver of the rating action is Nigeria’s increased external vulnerability. Assessed against Moody’s scenario of lower-for-longer oil prices, Nigeria’s external accounts have come under more pressure than expected since our rating affirmation in December 2015.

“The country registered a balance of payments deficit of 1.4 per cent of Gross Domestic Product (GDP) at end-2015, owing largely to its first current account deficit (3% of GDP) in over a decade. As a result, foreign currency reserves dropped by $6 billion to $28.4 billion last December and as of April 4, forex reserves were lower still at $27.7 billion.

“Moody’s notes that the government’s policy response alleviated some of the external pressures: the Ministry of Finance adjusted the budget further, while the central bank devalued the currency to N197/$1and imposed foreign currency restrictions and soft capital controls. However, the central bank’s measures have also hampered economic activity as a number of sectors rely on access to foreign exchange for their ongoing operations.

“Should oil prices remain low, pressure on the exchange rate is likely to continue, evidenced by the persistence of a parallel market for dollars. Although the government says that the soft capital controls are temporary, they have nonetheless deterred foreign investment — foreign direct investment (FDI) inflows halved from 2014-15 while portfolio net investments have fallen by a multiple of 5 since 2013, from $13.6 billion to $2.5 billion in 2015. We still forecast a moderate current account deficit in 2016 of 2.3% of GDP and a likely further decrease in FX reserves to $25 billion,” it added.