The global ratings firm S&P has affirmed Nigeria’s ranking of B/B with a stable outlook but it also warns that this rating could be lowered if Nigeria’s foreign exchange reserves were to decline markedly and if the country’s external debt rises faster than first estimated.
In a detailed report made available to BusinessDay, S&P said “the ratings remain constrained by the country’s low economic wealth, weak institutional capacity and lower real GDP per capital trend growth rates than peers at similar development levels.”
The report noted President Muhammadu Buhari’s centralized decision making style and its choking effect but said his re-election gives the leader of Africa’s most populous nation at opportunity to make amends by strengthening his government’s economic policy framework and consolidating public finances.
S&P, however, noted one positive trend, saying, “in our view, the increase in the availability of foreign currency and the flexible exchange rate have helped the non-oil sector grow.”
The report said it is not expected that Nigeria will formulate any policy to merge the various exchange rate windows.
The agency said it sees net external debt rising over the 2019-2022 “if fiscal financing remains externally funded and external buffers stay at current levels.”
It said it expects Nigeria to issue further Eurobonds before moderating issuance levels in 2020-2022 and assumes that the nation’s reserves will remain at current levels.
On debt, S&P said, “we project the general government deficit which combines deficits at the federal, state and local government levels will remain above 3% of GDP this year. …we project average debt-servicing costs for 2019-2022 of 30% of general government revenues.”
On the banking sector, S&P, said, “the banking sector has been operating under difficult economic and regulatory circumstances. We still consider the Nigerian banking sector to be in a correction phase. It suffered high credit losses of 2.5%-3% over the past two years and we expect flat or negative credit growth in 2019-2020.
“That said, the banking sector has stabilized since the 2016 oil price shock–we think material change unlikely in the next 12-24 months. We also expect profitability at the top-tier banks to remain resilient to the credit cycle.
“In 2018, Nigerian banks implemented International Financial Reporting Standards (IFRS) 9 using their regulatory risk reserves, thus shielding their capital ratios from breaching the minimum capital requirements.”
