S&P Global Ratings agency has downgraded Nigeria from stable outlook to negative. The rating agency confirmed this in a research update published on February 28 2020.
Why the downgrade?
According to the update cited by Nairametrics, the rating agency claimed it was revising the outlook for Nigeria from stable to negative owing to a string of issues befalling Africa’s largest economy.
- Nigeria’s economic growth remains weak, slower than that of several peers at a similar rating level. Weak growth, sizable public debt, and external pressures are all weighing on Nigeria’s creditworthiness.
- 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 we consider to be vulnerable to a change in investor sentiment.
- Owing 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.
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The rating agency also had some positives for Nigeria
- Increased nonresident participation in domestic markets has been driven by the more-open, liberalized 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.
- 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.
On CBN maintaining FX reserves
- 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.
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What this means
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.
It could also worsen the situation for the Nigerian stock market, which relies heavily on foreign investor inflows to boost demand and prices of stocks. Foreign investors have largely avoided Nigerian stocks due to policy inconsistencies on the part of the CBN.
