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Here’s what Fitch, Moody’s negative outlook means for Nigeria

Zainab Shamsuna Ahmed

Barely two weeks after New-York based rating agency, Moody’s, downgraded its outlook for the Nigerian economy, Fitch Rating on Thursday did same, with both forecasting a gloomy outlook for 2020.

The US-based rating agency revised its outlook for the Nigerian economy to negative and affirmed the rating at B+.

The downward revision, Fitch said, was as a result of Nigeria’s increasing vulnerability from its current macro policy setting, raising the risk of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira.

Early this month, Moody’s hammered Nigeria with a negative rating, in what it said was due to increased fragility of the country’s public finances and sluggish growth prospects. Moody’s also downgraded the outlook for Nigerian banks as well as their counterparts in other African countries. This sent stocks of listed firms to lower lows as investors reacted to the downward rating.

Like Moody’s, the downward rating by Fitch has serious implications on the health of Africa’s largest economy, especially at a time when the economy requires enough investment oxygen to breath, analysts who spoke to BusinessDay say.

These implications are highlighted below.

High Borrowing Cost

Being downgraded can have a big impact on a country’s ability to borrow money froom the markets, as investors see it as a riskier bet and demand higher returns to lend to governments, according to Gbolahan Ologunro, an equity researcher at CSL Stockbrokers.

“But for falling yields in advanced countries, Nigeria would have had to pay at a higher interest than it did on offshore borrowings,” he said.

Nigeria plans on borrowing about $22.7 billion dollars from various sources, to fund 39 projects across various sectors from transportation to education.

Already, in the 2020 budget, Nigeria plans to spend almost a third of its projected revenue to service its debt that has almost tripled to N25 trillion in the last four years.

With a revenue projection of N8.42 trillion in the 2020 fiscal year, debt servicing is expected to gulp N2.452 trillion or 29 percent, according to a statement by Zainab Ahmed, minister of finance, budget and national planning. That’s high when compared to the 14.5 per cent used in servicing debt in 2019.

With dwindling revenue in the wake of falling oil prices, it would become difficult for the government to meet up with its financial obligation.

According to Fitch, Nigeria’s debt remains on an upward path, while particularly low fiscal revenues and structural shortcomings in public finance management constrain the sovereign’s ability to support a rising debt burden.

Such a weakness, Fitch says, is illustrated by rising monetary financing, a large and uncertain amount of government arrears, and a multitude of contingent liabilities on which transparency is poor.

“This has made the government look on the Central Bank for life support, with Net claims by the CBN on the FGN reaching an all-time high of 3 per cent of GDP in August, equivalent to federal government revenue,” Fitch said.

Exchange rate pressure

With the downgrade negative, from two of the world’s biggest rating agencies, the risk associated with short-term assets including the CBN’s OMO and the treasury bills will likely increase, thereby putting pressure on the exchange rates as portfolio investors scale down on exposure of Nigerian asset.

Last month, the Central bank barred non-bank local investors from participating in its N14 trillion OMO market.

This has resulted in an influx of non-foreign institutional investors’ scramble in the treasury bills market, crashing the average yields to as low as 7 per cent, according to FMDQ data.

With Inflation at a record high of 11.9 per cent in November, real yields stood negative at (-4 per cent).

Fitch says the lower liquidity in the OMO market due to the narrower range of participants is likely to have dampened net portfolio inflows, contributing to a 12 per cent drop in FX reserves in November from end-June to their lowest level in two years.

Declining FX reserves

The downgrade to negative can further lead to shrinking reserves as the country continues to cushion the effect of increasing outflows.

Last month, the CBN said it saw no adjustment in its exchange rate in sight, except its reserves fall below $30 billion while oil price, which accounts over 85 per cent of the countries exchange earnings fall below $45 per barrel.

Nigeria’s reserves as of 19th December stood at $38.9 billion, according to CBN data, showing a decline of about $6.1 billion from the start of the year.

Fitch noted that under Nigeria’s current economic framework, a sharp devaluation of the currency will stoke macroeconomic volatility and significantly weaken some of the country’s key credit metrics, including its gross domestic product per capita in dollars and its share in world GDP.

The naira closed 364/$, Friday, at the I&E window.

Fitch says the substantial appreciation of the naira over the last years is uncorrelated with macroeconomic fundamentals and is set to continue, driven by high inflation.

Weak investor’s sentiment

The Nigerian stock market has fallen to a negative return of 15.16 per cent, based on data obtained from Bloomberg terminal, as investors look beyond juicy returns from quoted companies to await far-reaching reforms, especially from the monetary side.

The downgrade to negative by Fitch could further exacerbate investor’s already weak sentiments.