Not long ago, Nigerian bonds were hailed as the best performers in Africa, but that rally risks coming to a bruising end as the credit rating of the continent’s biggest economy slides deeper into junk say analysts.
Standard & Poor’s lowered its assessment on Nigeria one level to B+, four levels below investment grade, on March 20, while changing its outlook to stable from negative. Naira bonds returned 2 percent this month, the most among 31 emerging markets after Russia and the Dominican Republic, as naira debt lost 5 percent in February, according to Bloomberg indexes.
The economy is sputtering under the weight of a more than 50 percent plunge since June in the price of oil, its main export, and an insurgency by Islamist militants before elections on Saturday. While the CBN has stemmed a slide in the naira with 17 foreign-exchange restrictions since September, policy makers may devalue the currency after the vote, so it doesn’t make sense to buy local bonds, according to Alan Cameron, an economist at Exotix Partners LLP in London.
“A downgrade worsens public and investor perception of the economy, which is already being hit,” Kunle Ezun, an analyst at Ecobank Transnational Inc. in Lagos, said by phone last week. Borrowing costs will increase because of the negative signal it sends, he said.
The naira lost 18 percent against the dollar in the past six months, the steepest decline among 24 African currencies tracked by Bloomberg after the Zambian kwacha. It touched an all-time low of N206.32 per dollar on Feb. 12. The naira advanced 0.1 percent to 199.05 as at 10:47 a.m. in Lagos on Monday.
The International Monetary Fund cut its 2015 growth forecast for Nigeria to 4.8 percent on March 5, from 6.3 percent last year and about half the average rate over the past 15 years. Nigeria’s central bank has cut foreign-exchange reserves by 13 percent this year to $30.1 billion to defend the naira.
Depleting foreign-exchange reserves to their lowest level since 2005 means the central bank’s “capacity to intervene in the currency market has diminished rapidly,” David Faulkner, a Johannesburg-based economist at HSBC Holdings Plc, said in a note on March 20. “Risks to the currency remain elevated.”
Electoral officials delayed a vote set for Feb. 14 after President Goodluck Jonathan’s security adviser said the army couldn’t guarantee voters’ safety in the north east, where a six-year insurgency by Islamist group Boko Haram has killed more than 13,000 people. Jonathan will face former military dictator, Muhammadu Buhari, in what is set to be the closest election since Nigeria ended military rule in 1999.
“The tightly contested general elections may pose risks to Nigeria’s external position,” S&P said in a March 20 statement. “The exchange rate and monetary policy could continue to come under pressure due to the fall in oil prices, political risks, or changes in investor risk appetite.”
Nigeria is among other oil producers being downgraded by S&P, the country’s finance ministry said in a statement on March 20. The ratings company’s outlook for 2015 growth is better than IMF forecasts and being driven by non-oil industries, which will continue to support the economy, the ministry said.