Moody’s Negative Outlook… A Reflection of Current Realities

Nigeria suffered an outlook downgrade from stable to negative by Moody’s. Increasing fragility in public finances and sluggish growth prospects, which pose great risks to government's fiscal strength and external position were the main concerns. However, the rating agency affirmed the B2 long-term local and foreign currency issuer ratings, the B2 foreign currency senior unsecured ratings, and the (P) B2 foreign currency senior unsecured MTN programme rating. This is the second change made since November 2017, when Moody’s downgraded Nigeria’s sovereign issuer rating to B2 from B1, but maintained a stable outlook.

This change in outlook is unsurprising although worrisome and clearly reflects the prolonged weak macroeconomic fundamentals continuous decline in the trade surplus to ₦242.8bn (Q2:2019 trade report), downtrend in capital importation to $5.4bn (Q3:2019) and the moderation in external reserves to $39.7bn (down 12.0% since H1:2019 and 8.0% YTD) amid elevated global risks which Nigeria faces.

We note that the decline in external reserves mirrors an increasingly weak external position despite easy global monetary conditions which should support foreign capital inflows into emerging markets. However, we do not expect any sudden turnaround in the near term given that major downside risks, including capital flow reversals, weak current account balance and the possible impact of the $9.6bn case involving the FGN and P&ID Limited, still abound.

On the fiscal side, the FG’s debt profile is still growing amid weak revenues with the total public debt as at H1:2019 rising 5.4% to ₦25.7tn ($83.9bn) from ₦24.4tn ($79.4bn) as at FY:2018 due to increased FGN borrowings at 6.2% to ₦20.4tn. While debt service cost moderated by 8.0% y/y to ₦1.0tn following the FG’s strategy to tweak the debt mix by increasing the share of foreign debt to 40.0%, debt sustainability remains a concern. Debt service-to-revenue as at H1:2019 is elevated at 48.3% and 43.8% of actual revenue collected and budgeted debt service respectively and we suspect these ratios could worsen by FY:2019. 

As the FG plans a return to the Eurobond market to partly finance the 2020 budget deficit of ₦2.4tn, the outlook downgrade may trigger weaker investor’s appetite for the Nigerian Eurobond market. More so, this could dampen foreign capital inflows especially foreign direct investment (FDI) inflows which has significantly remained low at $1.9bn relative to peers; Egypt ($6.8bn), South Africa ($5.3bn) and Ghana ($3.0bn) and the total $45.9bn FDI inflows into Africa as at FY: 2018, according to UNCTAD.