International credit rating agency, Standard & Poor’s (S&P), has downgraded Nigeria’s outlook for 2020 due to declining foreign exchange reserves. The downgrade could dampen investors’ appetite towards Nigeria’s Eurobond issuance and increase borrowing costs, analysts say.
S&P revised the outlook on Nigeria to negative from stable while at the same time affirming its ‘B/B’ for Nigeria’s long- and short-term sovereign credit ratings.
The New York-based rating agency also lowered its long and short national scale rating for Nigeria to ‘ngA-/ngA-2’ from ‘ngA/ngA-1’.
Long-term and short-term sovereign credit ratings of ‘B/B’ mean Nigeria remains in the non-investment or speculative-grade as an obligor that currently can meet its financial commitments but could face difficulty in doing so in the face of adverse business, financial, or economic conditions.
A Nigeria national scale ratings of ‘ngA-/ngA-2’ means the lowest risk business in the country is susceptible to adverse economic conditions although its capacity to meet its financial commitment on the obligation is satisfactory.
According to S&P, Nigeria’s ratings remained constrained by falling FX reserves, slow GDP growth, low GDP per capita, and low or negative real GDP per capita growth in dollar terms, increasing public debt and multiple exchange rates.
The downgrade in both the country’s outlook and credit rating is coming at a time when Africa’s largest economy is warming up to tap debt offshore for as much as $3.3 billion to plug its budget deficit for 2020 and refinance existing Eurobond.
S&P’s downgrade adds to a list of other international rating agencies to slap Nigeria with a negative outlook for the year, given current economic realities.
International rating agencies Moody’s and Fitch had last year revised their outlook for Nigeria from “stable” to “negative” in what they said was due to Nigeria’s increasing vulnerability from its current macro policy setting and the rising risk of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira.
However, while Fitch in its forecast had a slightly higher rating at B+, both Moody’s and S&P had a much lower rating at B2 and B, respectively.
The downgrade could increase Nigeria’s cost of borrowing by making foreign investors request for a higher yield when the country finally embarks on its Eurobond roadshow, according to Oluwatosin Ayanfalu, who holds the portfolio of an analyst at Lagos-based Zedcrest Capital.
Nigeria hopes to use the new capital raised to finance its huge infrastructural deficit which is expected to gulp $100 billion annually through the next 10 years.
The government would commit about $2.786bn from the Eurobond proceeds to finance capital projects in priority sectors of the economy in power, transport, works and housing, aviation, health, education, agriculture and rural development.
A part will also be used to finance existing $500m Eurobond that will mature next year, the Debt Management Office (DMO) said.
“Although the more important consideration will be the impact of the coronavirus on oil prices and how it affects our credit risk as a country given our dependence on oil, however, the report by the agency raises a lot of questions on our debt management practices and the vulnerability of the economy as this will also in a way be on the mind of investors who are looking at Nigeria’s debt securities particularly the foreign currency debt,” Omotola Abimbola, a macro and fixed-income analyst at Chapel Hill Denham, said.
The new downgrade by S&P adds to the country’s growing list of worries in the wake of the endemic coronavirus which has claimed 3,044 lives globally and tumbled oil prices following a slow demand from the world’s biggest importer of the commodity, China.
Brent crude, which is the international benchmark of Nigeria’s oil, plunged to $52 per barrel, below the country’s $57/b 2020 budget benchmark, a move S&P said would further put pressure on the reserves.
“We may lower the ratings if Nigeria’s international reserves decline markedly, external debt rises significantly faster than our current assumptions, or if our projections of gradual fiscal consolidation do not materialize,” S&P said.
Nigeria’s foreign reserves which serve as a shock absorber have been blown out to $36 billion, lowest levels in more than two years, as the country continues to keep the naira from falling against the dollar.
The central bank, in a bid to reduce the pressure on the dollar, restricted non-bank financial institutions including pension fund operators (PFAs) and insurance players from accessing its short-term bills. Following the directive, Foreign Portfolio Investors (FPIs) now hold about $12 billion of the country’s external reserves, S&P said.
The central bank, in a bid to reduce the pressure on the dollar, restricted non-bank financial institutions including pension fund operators (PFAs) and insurance players from accessing its short-term bills. Following the directive, Foreign Portfolio Investors (FPIs) now hold about $12 billion of the country’s external reserves, S&P said.
However, while the move has helped in channelling up investment into other asset classes, it has culminated into freeing up excess liquidity into the economy, with the CBN fearing likely inflationary pressure, with commodity prices rising to 21-month high of 12.13 percent in January.
With the fall in reserves and oil prices, S&P noted that the holdings of the CBN’s short-term bills could be subject to changes in foreign investor sentiment and a potential sell-off, thereby creating risks to current reserve levels.
“Given these risks, we have added CBN bills to general government debt. Therefore, our estimate of general government debt, net of liquid assets, now stands at an average of 39 percent of GDP in 2020-2023,” the ratings agency said.
Last week, Nigeria’s state-funded agency, the National Bureau of Statistics (NBS), published figures of gross domestic product, showing an uptick in economic activities.
The economy grew 2.27 percent in 2019, beating both the World Bank and International Monetary Fund forecast, to record its biggest growth since 2015, driven by the development in the oil sector, as the sector expanded 4.5 percent.
S&P noted that despite improvement in economic activities, Nigeria’s growth rate remains low relative to peers with similar wealth levels, and GDP per capita growth has remained negative in dollar terms.
The agency noted that nevertheless, the approval of the 2020 budget in 2019, before the start of the fiscal year, and much earlier than recent years, was favourable for budget execution and capital projects.
