Moody Cooperation, commonly referred to as Moody’s has revealed that Nigeria’s public finances are increasingly fragile in a “sluggish growth environment.”
The global business rating organisation also rated the government of Nigeria negative from stable in its recent ranking released 4th December 2019.
Moody’s, however, retained Nigeria’s B rating, stressing that its decision to affirm the rating at B2 recognises a combination of credit strengths including the country’s large and diversified economy supported by vast oil and gas endowments, notwithstanding persistent credit weaknesses such as its very weak institutions and governance framework and in particular poor public finance management.
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“Concurrently, Moody’s has maintained Nigeria’s country risk ceilings at their current levels: Foreign Currency bond ceiling at B1, Foreign Currency deposit ceiling at B3, and Local Currency bond and deposit ceilings at Ba1.”
It continued: “The affirmation reflects credit strengths supporting the B2 rating, balancing significant credit weaknesses. Nigeria’s economic strength is supported by the diversification of economic activity and very large oil and gas endowments. Moreover, Nigeria benefits from deep domestic capital markets to finance a still moderate debt burden at relatively long maturities. In turn, the long average maturity of debt contributes to moderate borrowing requirements for the government.
“Nevertheless, very weak institutions and governance strength, and in particular poor public finance management, remain a constraint to Nigeria’s credit profile.
“Meanwhile, only a durable and significant increase in non-oil revenue would improve the sovereign’s resilience to oil price volatility and provide scope to realize ambitious capital spending plans on the large infrastructure projects that are crucial to economic development. In the meantime, the fiscal deficits will remain elevated, debt affordability will remain weak and the government’s balance sheet will remain exposed to further shocks,” Moody’s said.
Explaining the reason for the negative outlook, Moody’s impressed that it is underpinned by rising vulnerability to an adverse change in external capital flows.
“Official foreign exchange reserves at around $40 billion at the end of October, or 5-6 months of import cover, at first appear to be relatively comfortable. However, Nigeria’s external position is increasingly dependent on foreign capital inflows in the form of portfolio investments, which by definition are volatile and susceptible to reversal.
“In order to maintain price and exchange rate stability, the CBN has issued domestic certificates (via Open Market Operations) to mop up naira liquidity, which has been boosted following the creation of the import-export windows by the central bank in 2017. The stock of certificates has grown very quickly to reach NGN17.4 trillion in September 2019 from NGN5 trillion in 2017, of which around NGN5.8 trillion ($16 billion) are currently held by foreign investors.
“In order to attract foreign investors, the CBN is paying high-interest rates on these certificates. This policy is very costly and with consequent impact on the yields of other government financing instruments. Importantly, the large holdings of foreign investors make Nigeria’s external position vulnerable to an adverse change in investor sentiment that could quickly materialize given the short-term nature of the instruments.”