January 30, 2023/CSL Research

Moody’s Investors Service (“Moody’s”) on 27 January 2023 downgraded the Government of Nigeria’s long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt rating to Caa1 from B3 and changed the outlook to stable. Moody’s also downgraded Nigeria’s foreign currency senior unsecured Medium-Term Note (MTN) program rating to (P)Caa1 from (P)B3.

The downgrade was hinged on Moody’s expectation that the government’s fiscal and debt position will continue to deteriorate. It noted that the government faces wide-ranging fiscal pressure while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and social challenges.

It was stated in the report that the falling oil production, increasingly costly oil subsidy, and rising interest rates will likely persist over the next couple of years, while a policy response post-election is likely to take some time to put Nigeria’s fiscal position on a more sustainable path.

As a result, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt will increasingly come at odds with other spending priorities.

The report further emphasised that the 2023 budget plans on an even larger fiscal deficit, while the government’s funding options remain narrow and reliant on Central Bank financing. In addition, the government’s lack of access to external funding sources will add to the external pressure from depressed oil production and capital outflows, thereby eroding further Nigeria’s external profile over time.

However, it was stated that immediate default risk is low, assuming no sudden, unexpected event such as another shock or shift in policy direction that would raise the default risk, hence,the outlook remains stable. On institutional weaknesses and social challenges, the report noted that the government has long held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially, and politically challenging to carry through.

However, we note that Nigeria’s non-oil revenue outperformed its target by 23% at the end of November 2022 and we expect a sustenance of the non-oil revenue trajectory in 2023. Our expectation is hinged on the resilience of the Trade, Telecoms and Financial sectors which should drive taxation income. While the manufacturing sector may continue to dwindle under the weight of higher interest rates and FX volatilities, we expect some respite from the commencement of Dangote refinery.

On the other hand, we note that crude oil production resumed a steady upbeat in Q4 2022 and we also expect a sustenance given increased government efforts at curbing crude oil pipeline vandalism and crude oil theft through the recent surveillance contract award to a former Niger Delta militant, Government Oweizide Ekpemupolo.

That said, we note that the Chief Executive Officer, NNPC Limited, Mele Kyari, had stated that the firm was now a private outfit and has nothing to do with FAAC anymore. Hence, the Federal Government is now only entitled to applicable taxes, royalties, and dividends. Overall, we agree with Moody’s that the country’s fiscal outlook remains weak particularly considering the high debt service and non-debt recurrent expenditure profile.