Worst-ever Moody’s rating sends Nigerian Eurobonds tumbling

Nigeria’s government bonds fell sharply on Monday after ratings agency, Moody’s slashed the country’s credit rating deeper into junk and to the lowest level on record.

Longer-dated maturities were down the most, with the dollar-denominated 2051 Eurobond sliding more than 2.6 cents to 69 cents on the dollar. The Eurobond was issued at 100 cents on the dollar in September 2021. Every other Nigerian Eurobond traded down on Monday, according to Bloomberg data.

Nigerian Eurobonds have struggled since last year despite rising oil prices as the country’s finances took a hit due to dwindling oil production and an expensive petrol subsidy that gulped over N4 trillion last year, a third of total expenditure.

The renewed sell-off in the Eurobonds is on the back of a credit downgrade by Moody’s to Caa1 from B3, which is on par with Pakistan and only a notch higher than ratings of Ghana and Mozambique, two countries in debt distress.

The downgrade was driven by Moody’s expectations that the government’s fiscal and debt position will keep deteriorating irrespective of who wins the crucial February presidential elections.

However, the analysts at Moody’s, the same ones who downgraded Ghanaian bonds and foresaw a restructuring last year, said that “Immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction,” Moody’s said.

The Central Bank of Nigeria’s latest rate hike would have played no small part in the downgrade by Moody’s as the hike increases the interest the government will pay to service the N23.7 trillion debt owed to the CBN.

The rate hike means the federal government would be paying 20.5 percent on the CBN loans which adds up to N405 billion a month in interest, piling more pressure on government earnings which is already being swallowed by debt service costs.

Under its baseline scenario, Moody’s projects that interest payments will consume about half of general government revenue over the medium term, up from an estimated share of 35 percent in 2022 and that general government debt-to-GDP will continue rising to about 45 percent, up from 34 percent in 2022 and 19 percent in 2019.

The International Monetary Fund (IMF) estimates the government spent 80 percent of revenues servicing debt in 2022 and expects the ratio to hit 100 percent by 2026.

It’s the second time in barely three months that Moody’s has downgraded Nigeria’s foreign credit rating and the latest move threatens the government’s foreign borrowing plans.

The latest rating action makes it harder for the country to tap international markets for funds as investors will demand much higher yield to compensate for the risk associated with Nigerian debt.

“The credit downgrade further shuts Nigeria out of the international capital market and means the next administration will have to work top boost oil production, end petrol subsidy and open up other sources of dollar inflows to compensate for the inability to raise Eurobonds,” a senior banker who did not want to be named said.

Moody’s had in October last year downgraded the ratings of Africa’s biggest economy to B3 from B2 and placed them on review for downgrade. The following month, another credit agency, Fitch Ratings, lowered the county’s long-term foreign-currency issuer default rating to B- from B.

According to Moody’s, obligations rated Caa are judged to be speculative or of poor standing and are subject to very high credit risk.

Nigeria started getting credit ratings from Fitch Ratings in January 2006, S&P in February 2006 and Moody’s in November 2012, according to data from World Government Bonds.

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Moody’s said while a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for February 25, 2023 and thereby support fiscal consolidation, implementation would likely remain lengthy amid marked social and institutional constraints.

“Indeed, the government has long-held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially and politically challenging to carry through. Meanwhile, funding conditions are likely to remain tight.”

The Moody’s downgrade is, however, quite harsh, according to Razia Khan, chief economist, Africa and Middle East at Standard Chartered Bank, who said it was “overdone” in her view.

“The assumption seems to be that a local currency debt restructuring may be needed at some point in the future to lower the debt service burden on the budget, but has anyone looked at bill yields?” Khan said.

“The one-year bill rallied to 2 percent (last week) less than the proposed coupon under Ghana’s domestic debt exchange. Of course, whether such low yields are ultimately sustainable for Nigeria remains an important question. Even so, Caa1 seems overdone,” Khan said.

Asides downgrading Nigeria’s foreign currency debt, Moody’s also lowered the country’s local currency country ceilings to B2 from B1.

It said the local currency country ceiling at B2 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.

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