A global credit rating agency, Moody’s Investors Service, has downgraded Nigeria’s local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2 and placed them on review for downgrade.
Moody’s said on Friday that it downgraded the country’s foreign currency senior unsecured medium-term note rating to (P)B3 from (P)B2, and placed it on review for downgrade.
“The rating downgrade is driven by the significant deterioration in Nigeria’s government finances as well as its external position, exerting increasing pressure on the sovereign credit profile despite a strong increase in international crude oil prices in 2022,” it said.
Moody’s assessment is that these developments are partly the result of weak governance and likely to last, according to a statement.
It said the steep fall in oil production in 2022 and the extension of the expensive oil subsidy had almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices.
The rating agency said: “Policy levers available to manage weaker oil revenue and rising borrowing costs amid monetary tightening in Nigeria and globally are limited. Similarly, on the external front, the capacity of the Central Bank of Nigeria to protect foreign exchange reserves from external outflows has its limits.
“The initiation of the review for downgrade is prompted by the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government’s capacity to service debt and thereby increasing further its risk of default.”
It said the review would focus on understanding the Nigerian authorities’ strategy to address both domestic and external pressure and assessing the associated default risk for the government’s private creditors.
Moody’s recalled that on October 13, 2022, the government publicly said possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody’s default definition.
It said: “Concurrently, Moody’s has lowered Nigeria’s local currency (LC) and foreign currency (FC) country ceilings to B1 and B3 respectively, from Ba3 and B2 respectively. The LC country ceiling at B1 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 B3 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.”