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HomeBusinessMoody’s downgrades: Implications on Nigeria debt status

Moody’s downgrades: Implications on Nigeria debt status

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In conclusion of the review for a downgrade initiated on 21-Oct-22, Moody’s Investors Service (Moody’s) on Friday, downgraded the Nigerian Federal Government (FG) long-term foreign-currency (FCY) and local currency (LCY) issuer ratings as well as its foreign currency senior unsecured debt ratings to Caa1 and B2 respectively, from B3 and B1 respectively.

In many cases, it is one in which we can say was expected given developments around Nigeria’s fiscal problems and failure to make progress on fiscal consolidation efforts post-Covid.

Moody’s primary consideration for this downgrade was Nigeria’s fiscal health and debt position. As highlighted in our insight on 26-Jan, revenue generation remains the major fiscal constraint on the FG.

According to the Budget Office, total revenue for the period Jan- to Nov-22 printed at N5.9 trillion, 77.4 percent of the budgeted revenue. Moreover, oil revenue at N586.7 billion was 29.2 percent of its budget projection.

Also, the FG’s revenue target in the 2023 budget is ambitious. On the other hand, the FG has continued to spend ambitiously with total expenditure for January to November 2022 printing at 87.7 percent of the prorated budget.

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Thus, the budget deficits have continued to widen, piling further debts with total debt stock now estimated at N77.0 trillion (including CBN’s overdraft).

As we discussed in our 26-Jan insight, this situation is not likely to change as the FG continues to remain overly ambitious in its spending plans, despite sub-optimal revenue generation.

Further on the FG’s debt position, under its baseline scenario, Moody’s estimates that debt-to-GDP will rise to 45.0 percet in the medium term (vs 34.0 percent in 2022). These circumstances increase the risk of a negative feedback loop.

By implication, the downgrade signals an increase in the FG’s credit risk. While the finance minister has indicated that Nigeria will not be approaching the Eurobonds market this year, we believe the downgrade all but shuts Nigeria out of the market regardless of the FG’s preference.

Additionally, we expect an upward repricing of Nigerian Eurobond instruments in the secondary market as investors factor in higher credit premium.

Interestingly, the market already moved in anticipation of the downgrade as buy-interest slowed in the week ending 20-Jan, as the average yield on Nigerian Eurobonds climbed 48bps w/w to close at 10.8 percent.

~United Capital

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