Moody’s sees Nigeria’s economy rolling downhill

Sopuruchi Onwuka

Nigeria’s prevailing fiscal mess will have no short term fix even though there is no imminent risk of default in the nation’s debt instruments, according to the final assessment of the Nigerian economy by international rating agency, Moody’s.

The agency stated in its latest report on the country that the economy is already rolling downhill, propelled by widening fiscal gaps and the associated pressure on government to continue borrowing to address budget deficits and service existing debts.

It also warned investors of Nigeria’s weak capacity for taming systemic corruption, failing rule of law, weak fiscal and monetary policy effectiveness and opaque management of public resources.

It noted that Nigeria’s management of oil revenue is particularly weak; addition that government has failed to install fiscal stabilizers and runs “pro-cyclical policy or worse fails to take advantage of high international oil prices as illustrated in 2022.”

Moody’s also pointed at government’s lack of transparency in managing resources,  noting that “weak data reporting is also a key credit constraint, impairing policy assessment and decision making.”

Consequently, Moody’s Investors Service (“Moody’s”) weekend downgraded Nigeria’s long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt ratings to Caa1 from B3 and changed the outlook to stable.

In concluding review for downgrade initiated on 21 October 2022 Moody’s also downgraded Nigeria’s foreign currency senior unsecured MTN program rating to (P)Caa1 from (P)B3.

Also in casting the nation’s fiscal outlook, the agency stated that the debt legacy of the government of President Muhammadu Buhari would continue to cast gloom in the Nigerian economy in the short to medium term, pointing out that the nation is currently weakened by institutional and social challenges.

“Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate is the main driver behind the rating downgrade. The government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.

“Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates has intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items,” the agency stated in the report.

Moody’s projected that Nigeria’s government would continue to rely on incremental borrowing programmes in the midst of dwindling revenue windows. It added that the pressure on the country’s fiscal plans would outlive the incumbent government of President Muhammadu Buhari whose tenure has witnessed the country’s worst fiscal irresponsibility.  

“The 2023 budget plans on an even larger fiscal deficit than in 2022, while the government’s funding options remain narrow and reliant on central bank financing.

“In addition, the government’s lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, thereby eroding further Nigeria’s external profile over time,” Moody’s stated.

The agency however lowered the country’s risk of defaulting on its external debt responsibilities barring all chances of global economic shock and monetary policy shifts. It declared that Nigeria’s outlook might not be good but remains stable.

“At this stage, immediate default risk is low, assuming no sudden, unexpected events such as another shock or shift in policy direction that would raise the default risk,” Moody’s stated.

In stressing difficulties new economic programmes after Buhari might face in arresting the prevailing decline and activating recovery, Moody’s stated that “while a new administration could reinvigorate the reform impetus in Nigeria after the general elections planned for 25 February 2023 and thereby support fiscal consolidation, implementation will 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 agency noted.

Moody’s also lowered Nigeria’s local currency (LC) and foreign currency (FC) country ceilings to B2 and Caa1 respectively, from B1 and B3 respectively.

“The LC 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. The FC country ceiling at Caa1 remains two notches below the LC country ceiling, reflecting significant transfer and convertibility risks given the track record of imposition of capital controls in times of low oil prices or falling oil production,” it stated.

In justifying Nigeria’s downgrade to Caa1, Moody’s stated that its review for downgrade focused on the country’s “fiscal and external position and the capacity of the government to address the ongoing deterioration – other than by alleviating the burden of its debt through any form of default, including debt exchanges or buy-backs.”

It also maintained that deterioration in Nigeria’s fiscal and debt position is likely to continue as pressure from falling oil production, the increasingly costly oil subsidy and rising interest rates are likely to persist over the next couple of years.

Even if the incoming government were to take a policy response after Buhari leaves office in May, Moody’s noted, it would still take some time to put Nigeria’s fiscal position on a more sustainable path.

“As a result, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt increasingly coming at odds with other spending priorities.

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

Moody’s also stated that Nigeria’s oil production outlook and the securitization of past advances from CBN remain uncertain.

Moody’s maintains that “fiscal consolidation primarily hinges on raising the level of non-oil revenue, which at the general government level has so far bounced back to levels last witnessed in 2014 after successive shocks. However, boosting non-oil receipts beyond this recovery level will likely be incremental.

Moody’s baseline scenario is that “the government will phase out the oil subsidy only very gradually, and replace it by a more targeted and less costly social transfer.”

On the country’s weak position against the prevailing economic risks, Moody’s noted that whereas “a new political leadership with renewed willingness and sufficient political capital to tackle fiscal issues, weak institutional capacity and vested interests suggest that implementation will be lengthy.”

It pointed out that Nigeria’s indicators measuring governance and social outcomes are particularly weak; adding that data and assessment on key policy issues are lacking.

With limited funding options and draining revenue windows amidst huge debt obligations, Moody’s noted, Nigeria will face harsh borrowing terms in the year with interest rates expected to be higher while international debt windows would likely close against the country.

The agency said that government would likely rely in domestic lenders and the CBN for its 2023 borrowing programme.

“The financial sector remains underdeveloped relative to many of Moody’s rated sovereigns globally, with the banking sector representing the main segment (36% of GDP in assets) and carrying already large on-balance sheet exposure to the government and the CBN (42% based on Moody’s-rated banks),” the agency pointed out.

The situation, it observes would likely erode Nigeria’s external profile.

“Depressed and uncertain oil production, capital outflows amid flight to quality and the government’s constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023.

“The external position is more controllable for the authorities, but the continuation of CBN’s management of foreign exchange through restricted quantity of supply risks exacerbating external pressure over time.

“Moody’s expects that the authorities will allow the foreign exchange rate to continue to adjust at an only very gradual pace,” it stated in the report.

“Constraints on external funding come at a time when the government’s external debt service in foreign currency is contained, thereby limiting immediate liquidity risks. Over the medium term, however, the external liquidity profile will likely erode unless the government can improve its access to external borrowing sources. This, in turn, will rely on the ability of the government to demonstrate a track record of delivering on fiscal reforms,” the agency added.

In justifying stable outlook for the country under the gloomy circumstances, Moody’s pointed at the potential for a renewed reform impetus after the election against persisting fiscal pressure and lengthy policy implementation amid marked socio-political constraints.

“It will likely take time for the new President to form a government and establish its policy agenda, and eventually start reversing the ongoing fiscal deterioration,” the agency declared.

“The capacity of the government to reduce its fiscal deficit in the shorter term is limited, but the debt amortization profile remains favorable for now, providing a time-window for the government to consolidate its fiscal position and foster confidence. During that timeframe, the government’s past and more recent efforts to raise non-oil revenue may yield more tangible results.

“On the other hand, should the government fail to deliver on fiscal consolidation, the government will devote an increasing share of its revenue to paying interest, potentially to the point where a debt restructuring is required to lower the burden on the budget,” Moody’s noted.

Moody’s also declared that Nigeria’s negative governance profile is very high.

“Nigeria has a very highly negative governance profile score (G-5 issuer profile), reflecting weak control of corruption and rule of law as well as very weak fiscal and monetary policy effectiveness and opaque management of public resources.

“Management of oil revenue is particularly weak; absent fiscal stabilizers, the government runs pro-cyclical policy or worse fails to take advantage of high international oil prices as illustrated in 2022. Weak data reporting is also a key credit constraint, impairing policy assessment and decision making.”