The recent downgrade of Nigeria’s long-term issuer and senior unsecured debt rating to B2 from B1 by rating agency, Moody, has revealed that Nigeria has a weaker economic position than last year.
By downgrading Nigeria’s rating, the government may need to pay a slightly higher interest rates whenever it seeks to borrow from foreign investors. It however does not dissuade foreign investors from investing in Nigeria.
It just means foreign investors will ask for more premium on their expected returns since Moody’s is saying that the government is in a far weaker position than it was last year.
According to Moody, Nigeria’s efforts to address the key structural weakness exposed by the oil price shock by broadening the non-oil revenue base have so far proven largely unsuccessful.
As a consequence, while debt levels remain contained and notwithstanding recent cyclical improvements, the government’s balance sheet remains structurally exposed to further economic or financial shocks, with interest payments very high relative to revenues and deficits elevated despite cuts in capital spending.
Moody acknowledge that despite a modest improvement in the economy, the government is still not strong enough. As such, with interest rates for government debts as high as 38% of revenues, the government has little room to maneuver should things go south again.
The stable outlook reflects the fact that the likelihood of a shock occurring that would further impair Nigeria’s economic and fiscal strength remains low, with external vulnerabilities having receded supported by the rebound in oil production, the current account projected to remain in surplus, and reserves boosted through external borrowings and increased foreign capital inflows. Medium-term growth prospects are also credit supportive.
Despite a cut in Nigeria’s credit rating, Moody’s still said the economy outlook was stable. Their reason was because oil prices seem to be rebounding evident by the increase in forex reserves, resumption of foreign investments into the country and a stable exchange rate.
If there is anything to worry about, it is the likely impact of a shock in the system. For example, if the threat by the Niger Delta Militants is actualized, then things could really go from bad to worse for the government. If this occurs, then everyone is in trouble.