Paris, October 21, 2022 -- Moody's Investors Service (Moody's) has today downgraded Nigeria's local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2 and placed them on review for downgrade. Concurrently, Moody's downgraded Nigeria's foreign currency senior unsecured MTN rating to (P)B3 from (P)B2, also and placed it on review for downgrade.
The rating downgrade is driven by the significant deterioration in Nigeria's government finances as well as its external position, exerting increasing pressure on the sovereign credit profile despite a strong increase in international crude oil prices in 2022. Moody's assessment is that these developments are partly the result of weak governance and likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices. Policy levers available to manage weaker oil revenue and rising borrowing costs amid monetary tightening in Nigeria and globally are limited. Similarly, on the external front, the capacity of the Central Bank of Nigeria (CBN) to protect foreign exchange reserves from external outflows has its limits.
The initiation of the review for downgrade is prompted by the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government's capacity to service debt and thereby increasing further its risk of default. The review will focus on understanding the Nigerian authorities' strategy to address both domestic and external pressure and assessing the associated default risk for the government's private creditors. On 13 October 2022, the government publicly stated possible options, consisting of extending the maturity of its debts, including through potential bond buybacks or exchanges, which may constitute a distressed exchange under Moody's default definition.
Concurrently, Moody's has lowered Nigeria's local currency (LC) and foreign currency (FC) country ceilings to B1 and B3 respectively, from Ba3 and B2 respectively. The LC country ceiling at B1 remains two notches above the sovereign issuer rating, incorporating some degree of unpredictability of government actions, political risk and the reliance on a single revenue source. The FC country ceiling at B3 remains two notches below the LC country ceiling, reflecting significant transfer and convertibility risks given the track record of imposition of capital controls in times of low oil prices or falling oil production.
RATINGS RATIONALE
RATIONALE FOR THE RATING DOWNGRADE TO B3
SIGNIFICANT DETERIORATION IN FISCAL AND EXTERNAL POSITION DESPITE HIGHER OIL PRICES
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.
On the fiscal side, the scope for the government to deliver on fiscal consolidation is constrained: Moody's expects government debt affordability to weaken further in the years to come from already very weak levels. Ultimately, as the government dedicates a growing share of its revenue to paying interest, the policy dilemma between servicing creditors and meeting the population's demand for social and economic development will intensify.
In particular, the cost of oil subsidy will soon absorb the whole revenue flow from the sector unless the subsidy mechanism is wound-down—a task that has been delayed multiple times despite the country's intensifying credit pressures. Nigeria's Ministry of Finance has recognized the pressing need to remove the oil subsidy, but its removal from mid-2023 onwards will likely prove difficult politically and to implement in practice. Meanwhile, the generation of non-oil revenue has gradually progressed broadly in line with budget targets but remains far from compensating for the lower oil revenue net of subsidy and higher interest payments. Therefore, Nigeria's share of revenue consumed by interest payments, which is already exceptionally high in 2022 at 65% at the federal government level and 35% at the general government level, is set to rise further. The Minister of Finance recognized in public statements that this budget constraint is a growing source of concern.
Externally, financial and capital outflows from Nigeria are exceeding the current account surplus, eroding foreign exchange reserves. CBN's foreign exchange reserves declined by $3 billion since the beginning of the year, reaching $37 billion as of September 2022. To limit the fall in reserves, the CBN's main policy response has been to ration foreign exchange liquidity, scaling down the size of its interventions in foreign exchange markets and accumulating a backlog of foreign exchange demand. Meanwhile, depreciation pressure on the currency has intensified, with the gap between the official and parallel market exchange rates widening. The limited foreign exchange liquidity has also affected banks and companies operating in Nigeria with need of cross-border transactions.
RATIONALE FOR THE REVIEW FOR DOWNGRADE
The review for downgrade reflects the risk that external and fiscal pressure further intensifies and constrains the government's access to funding. Government external debt payments remain contained over the coming years – and mostly due to the official sector – but sizeable enough to add to the external pressure absent external funding. Domestically, both the banking sector and CBN have important exposure to the government.
The review will focus on the authorities' policy response to alleviate external and fiscal pressure, including their strategy to manage debt service obligations and foreign exchange reserves, and their capacity to raise significantly government revenue. In that regard, the government has already announced that it is exploring options to lengthen the maturity of its debts, which may help limit the size of future funding requirements but could constitute a distressed exchange under Moody's definition depending on the terms and the debts affected. The review will also assess the likelihood of a devaluation of the currency, which the country resorted to in 2016 and which would increase the government's debt burden, weaken its affordability since 30% of the debt is denominated in foreign currency and raise social risks by fueling inflationary pressures. If sizeable, a devaluation of the naira would also exert downward pressure on the rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Nigeria's ESG Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to environmental risk and social risk and very weak governance that, with low wealth levels, leads to low resilience to E and S risks.
For Nigeria, exposure to environmental risks carries very high credit risks, reflected in its E-5 issuer profile score. Exposure to carbon transition risk is very high, given 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 we currently assume 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 heath 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, and 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 less than PPP$1.90 a day despite vast natural resources wealth. The successive oil shocks and the pandemic have exacerbated the exposure to social risk. 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.
Nigeria has a very highly 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 public resource. Management of oil revenue is particularly weak; absent fiscal stabilizers, the government runs 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 $5 billion in net oil revenue or 1% of GDP.
The publication of this rating action deviates from the previously scheduled release dates in the EU sovereign calendar published on https://ratings.moodys.com. This action was prompted by the intensifying external pressure and the sovereign's announcement of its plan to lengthen the maturity of its debts, potentially through bonds buybacks or exchanges.
GDP per capita (PPP basis, US$): 5,459 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 3.6% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 15.6% (2021)
Gen. Gov. Financial Balance/GDP: -6% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.4% (2021) (also known as External Balance)
External debt/GDP: 17.9% (2021)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 19 October 2022, a rating committee was called to discuss the rating of the Nigeria, Government of. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
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's 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.
The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
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Lucie Villa
VP - Senior Credit Officer
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
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Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
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