Moody’s downgrades Nigeria’s local and foreign currency ratings

Global ratings agency Moody’s has downgraded Nigeria’s long-term local and foreign currency issuer ratings as well as its foreign currency senior unsecured debt ratings from B3 to B2 and placed them under review for downgrade.

This is contained in a rating report released by Moody’s on October 21, 2022 stating that the decision was due to a significant deterioration in Nigeria’s public finances as well as its external position.

Moody’s said deteriorating public finances were putting increasing pressure on the sovereign credit profile despite a sharp rise in international crude oil prices in 2022.

What does that mean

A downgrade has negative implications for Nigeria, especially for its bondholders who are mostly foreign investors.

  • When a global rating agency like Moody’s downgrades Nigeria, borrowing costs in international debt markets become more expensive, increasing Nigeria’s borrowing costs.
  • This is because investors also assign a higher risk rating to bonds due to the downgrades and will demand higher interest on new bonds.
  • It could also affect current bonds, driving yields higher as investors sell the bonds due to ratings downgrades.

Moody’s Downgrade Breakdown

Moody’s said Nigeria’s fiscal challenges and dwindling external reserves contributed significantly to the decision to downgrade the country’s ratings from B2 to B3.

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  • “Moody’s Investors Service (Moody’s) today downgraded Nigeria’s long-term local currency and foreign currency issuer ratings, as well as its foreign currency senior unsecured debt ratings, from B3 to B2, and placed them Simultaneously, Moody’s downgraded Nigeria’s senior unsecured foreign currency MTN rating to (P)B3 from (P)B2, also and placed it on review for downgrade.

Moody’s also highlighted Nigeria’s oil revenue challenges despite rising oil prices while pointing to the depreciation of the naira due to demand pressure as specific factors influencing the downgrade.

  • “The sharp decline in oil production in 2022 and the extension of the costly oil subsidy have almost entirely eroded the increase in government revenue and exports that would otherwise have been anticipated by higher oil prices. Policy levers available to manage declining oil revenues and rising borrowing costs amid tight monetary policy in Nigeria and globally are limited.
  • “Similarly, on the external front, the ability of the Central Bank of Nigeria (CBN) to protect foreign exchange reserves from external outflows has its limits.”

The rating review highlighted that the deterioration in government revenue affects the government’s ability to service its debt, putting the country at risk of default.

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  • “The initiation of the downgrade review is motivated by the risk that the ongoing fiscal and external deterioration will accelerate, further weakening the government’s ability to service the debt and thereby increasing its risk of default.”

Scoring Information: At the same time, Moody’s lowered Nigeria’s national local currency (LC) and foreign currency (FC) ceilings to B1 and B3 respectively, from Ba3 and B2 respectively. The country’s LC cap at B1 remains two notches above the sovereign issuer’s rating, incorporating a degree of unpredictability of government actions, political risk and reliance on a single source of revenue. Country FC’s cap at B3 remains two notches below country LC’s cap, reflecting significant transfer and convertibility risks given the history of imposing capital controls in times of low oil prices or falling oil production.

Moody’s quotes Finance Minister’s comment

To further explain the rating decision, Moody’s appears to have referred to recent comments by Nigerian Finance Minister Zainab Ahmed that the country was considering debt restructuring.

  • The Debt Management Office came out to deny this saying she was quoted out of context.
  • However, Moody’s appears to have taken this as confirmation that the country sees debt servicing as a challenge to cash flow.
  • “The review will focus on understanding the Nigerian authorities’ strategy to deal with domestic and external pressures and assessing the associated default risk for the government’s private creditors. On October 13, 2022, the government publicly announced possible options to extend the maturity of its debt, including through potential bond buybacks or swaps, which could constitute a distressed swap under the default definition of Moody’s.

What Nigeria Must Do To Get A Rating Upgrade

According to Moody’s, an upgrade will be considered if the country is able to improve its revenues, especially from oil and gas.

  • “Moody’s would likely downgrade Nigeria if it concludes that fiscal and external pressure is likely to continue to intensify, with government financing options narrowing further. If Moody’s believes the likelihood of default, including through a distressed exchange, has increased, the rating could be downgraded several notches.
  • “If Moody’s concludes that a significant downgrade is highly likely, downside pressure on the rating would also develop.
  • Conversely, Moody’s would likely confirm Nigeria’s rating at the current level if it expects fiscal and external pressures, including those from the oil sector, to ease. A clear and prudent medium-term funding plan would support Moody’s view that debt service payment risk is consistent with the current rating.