June 25, 2024/CSL Research
Moody’s Investors Service has maintained Nigeria’s long-term foreign currency and local currency issuer ratings at Caa1, continuing the positive outlook from their December 2023 review. This decision reflects Moody’s assessment of Nigeria’s fiscal position and overall economic status.
Additionally, the ratings for Nigeria’s foreign currency senior unsecured debt and the foreign currency senior unsecured Medium-Term Note (MTN) program remain at Caa1 and (P)Caa1, respectively. Moody’s affirmation follows similar positive outlooks from other global ratings agencies like Fitch and S&P. Last month, Fitch Ratings raised Nigeria’s credit outlook from stable to positive and in February, Standard & Poor’s (S&P) maintained Nigeria’s credit outlook at stable.
Moody’s affirmed a positive outlook for Nigeria based on several factors including improvements in the country’s external balance, forecasts for positive economic change, clearance of the foreign exchange (FX) backlog by the CBN, and the maintenance of a hawkish monetary stance by the CBN in the first half of the year. Moody’s highlighted that the various reforms to Nigeria’s foreign exchange market are starting to yield positive results, aiding in the country’s external rebalancing.
Additionally, the clearance of the verified foreign exchange backlog by the CBN has bolstered confidence and attracted more flows back to the official market, leading to a significant increase in inflows captured by the CBN.
Moody’s also noted that since February 2024, the CBN has taken vigorous action to combat Nigeria’s high and rising inflation, raising the policy interest rate by a cumulative 750 basis points through three hikes. On the banking sector side, Moody’s highlighted several changes introduced by the authorities. Although these changes may be costly in the short to medium term, they are expected to lead to a stronger sector in the long run.
The CBN has removed banks’ ability to hold a positive net foreign assets position, reducing vulnerability to a Naira depreciation, and has significantly raised the minimum capital requirements.
The positive outlook maintained suggests Moody’s sees potential for improvement in Nigeria’s economic conditions, but the rating agency also highlighted that substantial risks remain that could impact the country’s ability to meet its financial obligations. Chief among the highlighted risks is the elevated inflationary environment.
According to the latest Consumer Price Index (CPI) report for May 2024, the headline inflation rate reached a record high of 33.95% y/y. However, we believe that headline inflation will begin to moderate slightly from the month of June, with a forecasted decline to 33.84%. Further risks to Moody’s positive outlook include the higher costs of oil subsidies and the likely introduction of supplementary measures to support vulnerable Nigerians.
