The World Bank has identified Nigeria and 14 other countries as having weak credit ratings for sovereign bonds. This is contained in its latest report, “The Great Reversal: Prospects, Risks, and Policies in International Development Association (IDA) Countries.”
The list includes Cameroon, Democratic Republic of Congo, Republic of Congo, Ethiopia, Ghana, Lao People’s Democratic Republic, Maldives, Mali, Mozambique, Niger, Nigeria, Pakistan, Solomon Islands, Sri Lanka, and Zambia, all classified as needing substantial support due to their lower income status.
The report read:
- “Among IDA countries, 15 have weak credit ratings for sovereign bonds: Cameroon, Democratic Republic of Congo, Republic of Congo, Ethiopia, Ghana, Lao People’s Democratic Republic, Maldives, Mali, Mozambique, Niger, Nigeria, Pakistan, Solomon Islands, Sri Lanka, and Zambia.”
It noted that synchronized interest rate hikes in many advanced economies in response to inflation have led to tighter global financing conditions. This shift has seen the median sovereign bond spread for IDA countries expand dramatically—from 4.7%-points in 2019 to a peak of 12.4%-points in May 2023, eventually settling at 7.8%-points by March 2024. These conditions have sidelined IDA countries with weak credit ratings from global capital markets, resulting in the longest bond issuance drought since the global recession in 2009.
The report added:
- “Elevated costs of borrowing have magnified debt challenges. The synchronized increases of policy interest rates in many advanced economies in response to high inflation led to much tighter global financing conditions—with significant increases in borrowing costs for IDA countries.
- “The median sovereign bond spread (the difference between the yield on U.S. Treasury securities and what a country pays on an equivalent issuance) for IDA countries rose from 4.7 percentage points in 2019 to a peak of 12.4%-points in May 2023, before falling back to 7.8%-points in March 2024.
- “This contrasts with the relative stability of sovereign spreads for other EMDEs in this period. IDA countries with weak credit ratings have been particularly marginalized in global capital markets. Prohibitively high financing costs have shut out many IDA countries from international capital markets and led to minimal bond issuance over the past two years, the longest issuance drought since the global recession in 2009.”
Rising debt and borrowing costs
The World Bank’s report details a concerning trend of widening fiscal deficits, leading to a significant rise in public debt relative to GDP in these nations.
From 2019 to 2023, the median government debt-to-GDP ratio in IDA countries increased by approximately 6.7%-points, nearly tripling the increase observed in other emerging markets and developing economies (EMDEs) to over 50%, the report noted.
Particularly in Low-Income Countries (LICs), public debt has escalated by about 12%-points of GDP between 2019 and 2023, with nearly 70% of IDA countries experiencing a rise in their debt-to-GDP ratios during this period.
The report read:
- “Fiscal strains in IDA countries are also evident in the rising proportion of government revenues allocated to interest payments. The combination of weak growth, high government debt, and elevated interest rates has led to a sharp increase in net interest payments relative to government revenues in IDA countries, to 7.3% in 2023.
- “This represents a surge of 3.3%-points from pre-pandemic averages—a much sharper increase than the 1.7%-points observed in other EMDEs. Increased interest payments are diverting crucial resources from essential government outlays on education, health, and infrastructure, which already lag spending in other EMDEs, thus further limiting long-term growth prospects.
- “In some heavily indebted IDA countries, interest payments now surpass historical average spending on healthcare, underscoring the severity of financing problems and their detrimental effects on public services and development initiatives.”
Fiscal strains and debt Distress
The World Bank report also shed light on the increasing fiscal strains as more government revenues are now allocated to interest payments. In 2023, IDA countries saw net interest payments relative to government revenues rise to 7.3%, a surge of 3.3%-points from the pre-pandemic averages, which is significantly higher than the 1.7%-point increase observed in other EMDEs.
The report noted:
- “The share of IDA countries in, or at risk of, debt distress has increased sharply in recent years. More than half of IDA countries assessed in debt sustainability analysis (DSA) conducted by the World Bank and the IMF—34 out of 67—are either in acute debt distress or at high risk thereof. This share was less than one-quarter in 2013. It rose significantly in the years before the pandemic and in 2021.”
What You Should Know
American-based credit rating agency, Moody’s Investors Service (Moody’s), moved Nigeria’s credit outlook from stable to positive in December 2023. The uptrend moves from stable to positive indicates, according to the statement, the possible reversal of the deterioration in Nigeria’s fiscal and external position as a result of the authorities’ reform efforts. However, the international firm maintains the country’s long-term issuer ratings at Caa1, noting that the structural reforms are undercut still by “weak fiscal and external positions.”
In January 2024, Nonyane and Toby Iles, Fitch’s Head of Middle East and Africa Sovereigns, cautioned that Nigeria’s interest payments to revenue ratio, which surpasses 40%, poses a significant weakness for its credit rating four times higher than the median for B-rated sovereigns. In November 2023, Fitch rated Nigeria at B- with a stable outlook despite a cornucopia of macroeconomic malaise- record-level inflation, wobbling naira, and limping crude oil production.
Also, in February 2024, the global credit ratings agency, Standard and Poor (S&P), affirmed Nigeria’s short-term foreign and local currency sovereign credit worthiness at ‘B-/B’ and Nigeria’s long- and short-term national scale ratings at ‘ngBBB+/ngA-2’. The firm noted that the outlook was stable. However, the firm stated that the challenge for President Tinubu’s administration remains managing the effects of inflation and currency depreciation.
More Insights
- The Minister of Finance and Coordinating Minister of the Economy, Wale Edun, recently said that Nigeria is contemplating issuing Eurobonds later in the year if the rates are considerably lower, stating that major issuers have informed the country of the possibility this year.
- Edun also said that the Federal Government plans to begin the issuance of domestic bonds denominated in foreign currency starting from the second quarter of this year.
- It was reported a few weeks ago that the Federal Government was enlisting investment banks such as J.P Morgan, Citi Bank, Chapel Hill Denham Standard Chartered Bank and others to as consultants for a proposed Euro bonds issuance- the first of its kind since 2022.
- However, the Debt Management Office (DMO) has denied official enlisting of the any firm as adviser for the proposed Eurobonds listing, noting that the process requires the approval of the Federal Executive Council (FEC) and the National Assembly.
