By Marcel Okeke
Moody’s, one of the world’s leading rating agencies, a few days ago, in its latest report, downgraded Nigeria over its deteriorating fiscal condition and public debt crises. The agency downgraded Nigeria’s long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt ratings and changed the outlook to stable. According to Moody’s, the latest rating action concluded the review for downgrade initiated on 21 October 2022.
Moody’s said its expectation that the government’s fiscal and debt position would continue to deteriorate was the main reason for the rating downgrade, adding that the government faces wide-ranging fiscal pressures while the capacity to respond remains constrained by Nigeria’s long-standing institutional weaknesses and mounting social challenges.
Says Moody’s: “Ultimately, the risk that a negative feedback loop sets in over the next couple of years between higher government borrowing needs and rising interest rates have intensified, exacerbating the policy trade-off between servicing debt and financing other key spending items.” At the moment, Government is yet borrowing to finance its 2022 supplementary budget; thus, further increasing the humongous public debt (outstanding) now put at N77 trillion. Specifically, on Tuesday, January 31, 2023, the House of Representatives approved the request by President Muhammadu Buhari to secure an additional One trillion Naira loan from the Central Bank of Nigeria (CBN) to fund the 2022 supplementary budget.
This is even against the backdrop that outstanding Ways and Means facilities from the CBN to the Government are deemed to have exceeded statutory limits. With respect to this, President Buhari had earlier in December 2022 placed a request before the Legislature to securitize the outstanding CBN loans. But, the House of Reps, while approving the new loan suspended the request to securitize the N22.7 trillion Ways and Means facilities “pending more details from the Executive.” Buhari had in a letter in 2022 requested that the N22.7 trillion Ways and Means loan be converted to a 40-year bond with a moratorium of three years. The N1 trillion new loan (approved by the Reps) is expected to be used to fund the N819.5 billion 2022 supplementary budget which the lawmakers approved last December.
In the face of this maze of multiplex public finance crises being brought forward from 2022, Moody’s noted that the 2023 budget is based on an even larger fiscal deficit than in the last year, adding that the government’s funding options remain narrow and reliant on central bank financing (that is the ‘Ways & Means’). Moody’s report also pointed out that the government’s lack of access to external funding sources would add to the external pressure from depressed oil production and capital outflows, thereby eroding Nigeria’s external profile over time.
At this point, the long-lasting inability of the apex bank to fully fund the repatriation of ticket sales income of many foreign airlines comes to mind. More than anything else, it was the acute scarcity of foreign exchange (on Nigeria’s part) that led to the trapping of legitimate income of the airlines in Nigeria. This situation has not appreciably abated; rather it has sent some ominous signals to the global community. In this regard, Moody’s only gave Nigeria a forlorn hope. According to the rating agency: “While a new administration could reinvigorate the reform impetus in Nigeria after the general election planned for February 25, 2023, and thereby support fiscal consolidation, implementation will likely remain lengthy amid marked social and institutional constraints. Indeed, the government has long held the aim of raising non-oil revenue and phasing out the costly oil subsidy, but these objectives necessitate reforms that are institutionally, socially and politically challenging to carry through.”
One of the immediate effects of Moody’s action has been the ‘tumbling’ of Nigeria’s bonds in the global financial market. According to Reuters, “Nigeria’s government bonds fell heavily on Monday (January 30) after ratings agency Moody’s downgraded the West African oil producer late on Friday, saying the government’s fiscal and debt position was expected to keep deteriorating.” As the bond prices tumbled, the premium or ‘spread’ investors demanded to hold Nigerian debt rather than ultra-safe U.S. Treasuries jumped 46 basis points to 777 basis points. Before now, Nigeria’s bonds had outperformed other African and emerging market issuers over the last six months, according to JPMorgan. But Moody’s says: “The review for downgrade focused on Nigeria’s fiscal and external position and the capacity of the government to address the ongoing deterioration – other than by alleviating the burden of its debt through any form of default, including debt exchanges or buy-backs.” Even with this explanation, it is not unlikely that other reputable rating agencies namely S & P and Fitch would tow Moody’s line in respect of Nigeria. This is because Nigeria, Africa’s biggest oil producer, is facing an ineluctable fate of a challenge with fiscal imbalance arising from dwindling oil revenue that has led to mounting deficits and a borrowing spree.
This is why Moody’s says that fiscal pressure from falling oil production, the increasingly costly oil subsidy as well as rising interest rates will likely persist over the next couple of years, while a policy response post-election is likely to take some time to put Nigeria’s fiscal position on a more sustainable path. “As a result, Moody’s expects that the scope to finance core spending to support the country’s social and economic development will remain constrained, with the service of debt increasingly coming at odds with other spending priorities. Under its baseline scenario, the rating agency projects that interest payments will consume about half of general government revenue over the medium term, up from an estimated share of 35 per cent in 2022 and that general government debt-to-GDP will continue rising to about 45 per cent, up from 34 per cent in 2022 and 19 per cent in 2019,” says Moody’s report.
The report argued that the crude oil production outlook as well as the securitisation of huge past advances from the Central Bank of Nigeria (CBN) remains uncertain. “In particular, the securitisation would bring a degree of fiscal relief but its lawfulness is being contested by the Legislature and its passage is uncertain. As a result, fiscal consolidation primarily hinges on raising the level of non-oil revenue, which at the general government level has so far bounced back to levels last witnessed in 2014 after successive shocks. However, boosting non-oil receipts beyond this recovery level will likely be incremental. Moody’s baseline scenario is that the government will phase out the oil subsidy only very gradually, and replace it with a more targeted and less costly social transfer,” it added.
The report insisted that Nigeria’s institutional capacity to design and implement a fiscal consolidation strategy remains very weak. According to Moody’s report, “While the general election scheduled for 25 February 2023 may result in a new political leadership with renewed willingness and sufficient political will to tackle fiscal issues, weak institutional capacity and vested interests suggest that implementation will be lengthy. Moreover, Nigeria’s social context and complex societal setup add further difficulties to delivering fiscal reforms. Nigeria’s indicators measuring governance and social outcomes are particularly weak; data and assessment on key policy issues are also lacking.”
In the final analysis, all these strongly point to the fact that the fate and future of the Nigerian economy are squarely and wholly dependent on the agenda and priority of the post-2023 election Administration. Would the new Administration opt for the herculean task and do the needful to pull the economy from the brink, or choose the ‘business as usual’ stance? We wait and see!
- Mr. Okeke, an economist, sustainability expert and consultant on business strategy, and a National Daily Analyst. He can be reached at: obioraokeke2000@yahoo.com