Moody’s changes Nigeria’s outlook to positive
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.
Since assuming office in May, the Tinubu-led administration has 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.
