The global rating agency, Moody’s, said Nigeria’s Credit Impact Score is highly negative (CIS-5).
According to the rating agency, Nigeria’s Environmental Social and Governance (ESG) levels reflect a very high exposure to environmental risk and social risk and weak governance that, with low wealth levels, leads to low resilience to Environmental and Social risks.
The ratings were contained in a report recently released by Moody as seen by Nairametrics.
According to Moody’s, Nigeria’s exposure to environmental risks carries very high credit risks, reflected in its E-5 issuer profile score.
What Moody’s is saying
The rating agency highlighted Nigeria as a country with a very high 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 the public resource. Moody’s went further to make use of current living conditions as practical examples of ESG-related risks in Nigeria.
- Exposure to carbon transition risk is very high, due to the very significant reliance on oil for the public sector and the economy as foreign exchange earnings from oil represent 80% of merchandise exports.
- Nigeria’s credit profile would face downward pressure in a scenario of more rapid global carbon transition than Moody’s currently assumes and that implied by stated policies internationally.
- Water risk and physical climate risk are also high, driven by the high share of the population exposed to unsafe drinking water, risks of flooding and health stress, as well as risks from waste and pollution respectively.
- Exposure to social risks is very highly negative (S-5 issuer profile score), mainly related to poverty, low education outcomes, poor health and safety indicators, and access to basic services.
- Infant mortality is one of the highest in Sub-Saharan Africa and poverty is widespread, with close to 40% of the population living on the Purchasing Power Parity (PPP) of less than $1.90 a day, despite vast natural resources wealth.
Nigeria’s oil market risks, highlighted by Moody’s
According to Moody, the successive oil shocks and the Covid-19 pandemic have exacerbated Nigeria’s exposure to social risks.
- GDP per capita remains well below 2015 figures, with growing inequality due to the most vulnerable households carrying a disproportionate part of the burden of successive shocks.
- Management of oil revenue is particularly weak; absent fiscal stabilizers, the government runs a pro-cyclical policy or worse, fails to take advantage of high international oil prices as illustrated in 2022.
- In 2021, the country’s hydrocarbon exports amounted to $41 billion, the general government received only $5 billion in net oil revenue or 1% of GDP.
- Nigeria’s fiscal and external position hasn’t benefited from higher oil prices in 2022, which have been 42% higher on average than in 2021.
- This is due to the 32% drop in oil production since the beginning of the year (recorded between January and September of 2022) and growing domestic consumption of petroleum products – a product of the country’s stage of economic development further incentivized by the expensive oil subsidy.
- The constraints on oil production increasingly appear structural, caused by repeated theft and lack of investment in infrastructure. While the oil sector is a relatively modest contributor to GDP, it is a primary source of revenue and foreign exchange generation.
How Nigeria can get an upgrade or downgrade according to Moody’s
- Moody’s would likely downgrade Nigeria’s rating, if it concluded that fiscal and external pressure is likely to continue to intensify, with the government’s funding options narrowing further. Should Moody’s assess that the likelihood of default, including through a distressed exchange, has increased, the rating may be downgraded by multiple notches.
- Should Moody conclude that a sizeable devaluation is highly likely, downward pressure on the rating would develop too. Conversely, Moody’s would likely confirm Nigeria’s rating at the current level if it expects that the fiscal and external pressure, including those arising from the oil sector, will ease. A clear, prudent medium-term funding plan would support Moody’s view that the risk regarding debt service payments is consistent with the current rating.
