S & P Rekindles Hope of Nigeria’s Economic Recovery, Revises Outlook

Kunle Aderinokun

Barely one week after Moody’s Investors Service downgraded Nigeria’s ratings, S & P Global Ratings revised the country’s outlook to negative from stable but affirmed its ‘B-/B’ sovereign credit ratings.

However, the revision is a step before downgrading.
S & P, one of the world’s leading rating agencies, predicted that the nation’s economy would recover and exceed its pre-pandemic size in 2023, with the expectation that it would record an annual growth of about 3.1per cent over 2023 to 2026.

It, however, pointed out that growth in GDP per capita terms would remain low, partly reflecting the country’s high population growth.
S&P, which made these known in its latest report on Nigeria at the weekend, noted that the country’s fiscal and external imbalances were being exacerbated by “low crude oil production, high refined-petroleum subsidy costs, high debt service expenditure, and associated sizable fiscal deficits.”

“Limited and expensive access to international capital markets, and a consequent increasing reliance on significant domestic funding at relatively high-interest rates, is further weighing on net interest costs and the government’s fiscal position,” it added.

On the forthcoming elections, the agency said the February 25 presidential election is “a close three-way presidential race,” pointing out that whoever emerges as the winner and becomes president “will inherit a deteriorating fiscal story,” even though all the three leading presidential candidates have pledged significant reforms.

S & P also lowered the country’s long – and short-term national scale ratings to ‘ngBBB-/ngA-3’ from ‘ngBBB/ngA-2’.
 The transfer and convertibility assessment remained ‘B-, it added.
It explained that “the negative outlook reflects increasing risks to Nigeria’s debt servicing capacity over the next one-to-two years due to intensifying fiscal and external pressures.”

Painting a downside scenario, it said, “we could lower the ratings if risks to Nigeria’s capacity to repay commercial obligations continue to worsen, either because of declining external liquidity or a reduction in fiscal flexibility. This could occur, for instance, if we see higher fiscal expenditure, higher debt servicing costs, or significantly reduced liquid foreign exchange reserve levels.”

For its upside scenario, it noted, “We could revise the outlook to stable if Nigeria experiences significantly stronger economic performance than we expect, and external and domestic financing pressures prove to be contained, while fiscal deficits decrease faster than we project.

Explaining the rationale, S & P pointed out that “The outlook revision reflects our view that Nigeria’s debt servicing capacity has weakened due to high fiscal deficits and increased external pressures. “These stresses stem from low (albeit recently rising) oil production volumes, large refined-petroleum subsidy costs, high debt service expenditure, and a relatively large planned fiscal deficit in the 2023 budget.”

“The economy is estimated to have expanded by about 2.8per cent in 2022, and we forecast real GDP to average 3.1per cent in 2023-2026. Below-capacity oil production will likely continue to affect export growth, while inflationary pressure, fiscal constraints, and sluggish investment will weigh on consumption and investment growth. However, after the elections, these factors are likely to be partially counterbalanced by a new, potentially more business-friendly administration.”