December 9, 2023/Moody’s Investors Service

Moody’s Investors Service has changed the Government of Nigeria’s outlook to positive from stable and affirmed its Caa1 long-term foreign currency and local currency issuer ratings, and foreign currency senior unsecured debt ratings. Moody’s has also affirmed Nigeria’s foreign currency senior unsecured MTN program rating at (P)Caa1.

The positive outlook reflects the possible reversal of the deterioration in Nigeria’s fiscal and external position as a result of the authorities’ reform efforts. The unification of foreign exchange windows and devaluations of the naira represent first steps to addressing the country’s foreign exchange shortages and support its external rebalancing. Moreover, the government has removed the largest part of the oil subsidy, a long-standing and often postponed reform. These policy changes, and those potentially to come, have raised the prospects of a fiscal and external improvement in the country’s credit profile.

The affirmation of the Caa1 rating reflects Nigeria’s still weak fiscal and external position;  the reform efforts may not be enough to improve its credit profile given Nigeria’s outstanding credit weaknesses. Increasingly high inflation generates spending pressure on the government and raises social risks, while the extent of fiscal relief from the removal of the oil subsidy remains unclear at this stage. Similarly, the outlook for oil production and external funding inflows remains key for any sustained improvement, but at this juncture remain uncertain. More broadly, policy coordination to fight inflation and preserve macroeconomic stability is hampered by institutional constraints, including the absence of reliable data that would support effective policy-making.

Nigeria’s local currency (LC) and foreign currency (FC) country ceilings remain unchanged at B2 and Caa1, respectively. The LC country ceiling at B2 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 Caa1 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.

Rating Rationale

Rationale for Changing the Outlook to Positive

Since taking office in May, the authorities have implemented two key policy changes that will improve the country’s fiscal and external profile if the transitional inflation risks that accompany the reforms are contained. First, the government followed through with the previous administration’s promise to end the oil-producing nation’s decades-old oil subsidy by the end of June 2023. Second, the Central Bank of Nigeria (CBN) unified the foreign exchange rate windows and devalued the naira, the local currency, on several occasions, with the longer-term objective to improve the functioning of the forex market.

The foreign exchange reform has several positive credit impacts. It helps better satisfy foreign exchange demand and reduces distortions in the Nigerian economy that have deterred foreign investment and provided arbitrage opportunities. It also supports the country’s balance of payments, both above (import compression) and below (foreign investment) the line of the current account. In the meantime, Moody’s estimates that the naira’s devaluation has limited negative impact on government finances. The negative effect on debt, 37% of which is denominated in foreign currency, is partly offset by higher local currency-equivalent revenue from oil proceeds.

Moreover, the CBN’s publication of its audited financial statements for 2016-22, the first since 2016, provided greater data transparency. While at the same time the CBN unveiled foreign-currency liabilities worth $14 billion for 2022, representing almost half of its foreign exchange reserves, Moody’s assessment had already factored the likely existence of such liabilities before their disclosure.

On the fiscal front, the removal of the oil subsidy in June will help alleviate the budget deficit. While the scale of the fiscal relief remains unclear, in part due to the lack of monitoring means from the authorities, Moody’s expects the impact to be non-negligible in light of the subsidy cost in 2022 estimated at 2% of GDP. Additional fiscal relief came in May from the exchange of short-term “ways and means” advances from CBN worth 10% of GDP against a bond at much lower financing costs for the government.

Rationale for the Caa1 Rating Affirmation

While positive, the reforms recently implemented may prove to be insufficient to improve Nigeria’s fiscal and external profile against the background of increasingly high inflation, a still uncertain outlook for the oil sector and the country’s institutional constraints.

The combination of the currency devaluations, totaling 42% against US dollar since the beginning of the year, and higher petroleum prices due to the removal of the subsidy, have pushed inflation to 27% in October. Elevated inflation is in turn putting pressure on the government’s interest and primary spending. In Nigeria’s challenging economic and social environment characterized by widespread poverty and social inequalities, social unrest due to worsening inflation could yet derail or reverse the reforms. In the meantime, domestic funding conditions are likely to remain challenging for the government amid tighter monetary conditions and a narrow base of investors.

Meanwhile, oil production and external funding inflows are key components of Nigeria’s external dynamics yet their future evolution remains uncertain. Due to extensive theft and the cuts in investment and production from operators in response, Nigeria’s oil production has been on a declining trend and has only partially recovered to 1.6mbpd as of October 2023 from a low of 1.1mbpd in 2022. More recently, the government has announced a set of external borrowing deals totaling $10 billion. However, the exact timing and scale of borrowing inflows, and their eventual repayment schedules, remain uncertain.

The capacity of the authorities to coordinate monetary and fiscal policies and curb inflation is also constrained by institutional weaknesses. The strength of institutions and governance remains very weak in Nigeria according to international surveys such as the Worldwide Governance Indicators. Policy formulation and data reporting often lack consistency, transparency and completeness, impairing policy effectiveness.

Environmental, Social, Governance Considerations

Nigeria’s ESG Credit Impact Score of 5 indicates the rating is considerably lower than it would have been if ESG risk exposures were not present. Nigeria combines very high exposures to all ESG risks.

Nigeria’s E-5 score reflects its very high exposure to carbon transition risk 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 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 heath stress, as well as risks from waste and pollution respectively.

Nigeria’s S-5 score reflects high poverty rates, 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. While its demographic is favorable, very weak education outcomes mean that the country fails to benefit from this potential. 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’s G-5 score reflects weak control of corruption and rule of law as well as very weak fiscal and monetary policy effectiveness and opaque management of public resources. 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. Weak data reporting is also a key credit constraint, impairing policy assessment and decision making.

GDP per capita (PPP basis, US$): 5,909 (2022) (also known as Per Capita Income)

Real GDP growth (% change): 3.3% (2022) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 21.3% (2022)

Gen. Gov. Financial Balance/GDP: -5.6% (2022) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.2% (2022) (also known as External Balance)

External debt/GDP: 17.8% (2022)

Economic resiliency: b2

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 05 December 2023, a rating committee was called to discuss the rating of the Nigeria, Government of. The main points raised during the discussion were: Authorities’ recent reform efforts to reverse Nigeria’s fiscal and external deterioration.

Factors That Could Lead to an Upgrade ur Downgrade of the Ratings

Moody’s would likely upgrade Nigeria’s ratings in case the risks from higher inflation and government borrowing costs are effectively contained while the government continues to maintain reform impetus. Evidence that fiscal consolidation currently underway is meaningful and supportive of the monetary tightening efforts to control inflation would indicate that the risks are receding. Additionally, strong non-oil revenue performance and improvements in oil production would exert upward pressure on the rating.

Moody’s would likely change the outlook to stable if inflation gets increasingly out of control and the government’s access to funding is still highly constrained – either because of tighter funding conditions or larger than currently expected borrowing requirements. Eventually, should such a situation unfold in a form of government’s liquidity crisis, that would exert downward pressure on the rating.