June 5, 2025/CSL Research
Moody’s Investors Service has upgraded Nigeria’s long-term foreign and local currency issuer ratings to B3 from Caa1, with a stable outlook. This marks a positive turning point for Nigeria’s credit profile, reflecting the country’s strengthening external and fiscal positions. Key reforms have driven this upgrade.
The liberalisation of the exchange rate has significantly improved foreign exchange reserves, while the removal of costly fuel subsidies has reduced fiscal pressures. Despite initial concerns about inflation and potential policy reversal, Moody’s notes that inflation is beginning to ease and borrowing costs are stabilising—suggesting these reforms are taking root. Additionally, tax reforms are starting to yield revenue gains, further strengthening Nigeria’s fiscal footing.
According to Moody’s, the stable outlook reflects expectations that Nigeria’s recent progress on external and fiscal reforms will continue—though potentially at a slower pace if oil prices decline. The assumption is that key policies, particularly the flexible exchange rate regime, will be maintained and supported by a healthy balance of payments. Over the next few years, Moody’s projects that Nigeria’s public debt will stabilize around 50% of GDP, while interest payments will consume roughly 35% of government revenue. These projections reflect both the benefits and ongoing challenges of recent economic reforms. However, risks remain. A significant drop in oil prices could strain the Central Bank of Nigeria’s (CBN) ability to sustain a flexible exchange rate, possibly weakening the naira and increasing the debt burden. Persistently high inflation could also delay the easing of interest rates, limiting the fiscal space.
The upgrade by Moody’s signals growing international confidence in Nigeria’s economic direction and policy reforms. While vulnerabilities such as oil price fluctuations and exchange rate risks persist, the reforms have begun to build resilience, paving the way for better access to capital markets and more sustainable growth. In our view, the upgrade reduces perceived sovereign risk, making Nigerian government debt more attractive to international investors who may have strict investment-grade thresholds or risk limits. A B3 rating, while still speculative, is notably better than Caa1 and indicates improving creditworthiness. The stable outlook suggests policy continuity and macroeconomic stability, which helps build investor confidence.
That said, we believe fiscal space remains constrained, and Moody’s projection that debt service will consume only 35% of government revenue appears optimistic in the short term. Nigeria’s debt burden continues to grow, while revenue generation remains limited, largely due to persistently low oil production. Although recent tax reforms are encouraging, they are still in early stages, and in the near term, oil revenues are expected to dominate government income.
As a result, achieving a substantial reduction in debt service ratios may be unrealistic in the immediate future, as we estimate the ratio could remain closer to 60%. However, Moody’s assumption may become feasible over the medium to long term, under a baseline scenario where reforms are sustained and deepened, oil prices remain moderately supportive, inflation trends downward, borrowing slows, and revenue performance improves significantly, especially from non-oil sources.
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