S&P Global Ratings agency in its recent report has downgraded Nigeria from stable outlook to negative. The rating agency said this in a research update. According to the update cited by the rating agency said it was revising the outlook for Nigeria from stable to negative owing to a string of issues. It said that Nigeria’s economic growth remains weak, slower than that of several peers at a similar rating level. According to the agency weak growth, large public debt, and external pressures are all weighing on Nigeria’s creditworthiness.
It also said that Foreign-exchange reserve levels have fallen from $45 billion at mid-year 2019 to $38 billion at end-2019 and $36.5 billion in February 2020. The Central Bank of Nigeria (CBN) has been issuing bills, which have attracted foreign investors. About a third of foreign-exchange reserves are derived from nonresident holders of these CBN bills, positions that is consider to be vulnerable to a change in investor sentiment. Also due to the late passage of the budget in 2019, government funding pressures resulted in increased financing from the central bank through overdraft facilities, as a consequence of these pressures, we are revising the outlook to negative from stable it said.
S&P said that increased nonresident participation in domestic markets has been driven by the more-open, liberalised exchange-rate system since April 2017, as well as relatively attractive returns on the CBN’s bills. This has, in turn, helped to boost foreign-currency reserves. It further said that the prompt passage of the 2020 budget–the first time it has been passed before the start of the fiscal year in several years–also provides the government an opportunity to raise external funding through commercial issuances or concessional funding if required, supporting FX reserves. Over our forecast period, export revenue could see some upside once production from new oil and gas fields comes on stream. Imports could reduce due to the current crackdown on smuggling of goods across Nigeria’s borders with neighbouring countries, as well as import substitution measures. This will help the current account move back into a surplus averaging close to 1.8% of GDP over 2020-2023, and thereby reduce downward pressure on reserves.
It said that there have been some outflows from nonresidents in 2019 in line with other frontier and emerging markets; however, the firm interest rates in the CBN market will likely ensure they remain attractive to nonresidents. If nonresidents remain in the market, central bank reserves should stay broadly around current levels of five months of current account payments. The prompt passage of the 2020 budget – the first time it has been passed before the start of the fiscal year in several years also provides the government with an opportunity to raise external funding through commercial issuances or concessional funding if required, supporting FX reserves. S&P is one of the leading rating agencies in the world and is relied upon for investment decisions in frontier and emerging markets. The negative ratings signal a possibility of a costlier debt round should Nigeria proceed with its Eurobonds. Foreign investors could demand a higher yield on the back of a higher risk rating due to this downgrade.
