S&P Serves Downgrade Notice on Nigeria’s Sovereign Rating

International credit rating agency, Standard and Poor’s (S&P) has placed Nigeria’s ‘BB-’ sovereign status on a negative credit watch.

 

S&P said in an emailed statement that there is a 50 percent chance of downgrading Nigeria at its next review, “if we believe the policy response on the external and fiscal side will fall short, or if political risks rise significantly.”

Economists have said this is “unsurprising” as the sharp fall in oil prices since June 2014 and a heavy reliance on oil receipts for government funding, led to S&P’s lower revision of key macroeconomic forecasts for Africa’s largest economy and biggest oil producer.

“We now forecast an average current account deficit of 1.8% of GDP in 2015-2017, compared with our previous expectation of a surplus averaging 3.3%.” writes Ravi Bhatia, credit analyst at S&P’s London office, adding that the exchange rate and monetary policy could come under further strain.

Analysts’ consensus in the market favour a further devaluation of the naira, having reached an all time low of N205 against the dollar at the interbank forex market yesterday.

On government debt, S&P expects Nigeria’s profile  “to compare favourably” with other peer countries at about 22% of GDP for 2015-2018 but warns on the burden of government revenues to service an aggregate debt stock almost twice its size.

“While Nigeria’s debt is not particularly high at 17 percent of GDP (some countries have 200 to 300 percent), the weakness of Nigeria’s situation is the ability to service the debt” says Ayo Teriba, economist and CEO of Economic Associates in Lagos.

“For example in 2015, the government budgets a debt service amount of N943 billion which is 25 percent of its N3.6 trillion revenue estimate. I believe this is understated and could rise to 50 percent.”

“If credit rating is about the ability of the country to honour its obligations to meet debt servicing or principal repayments that fall due, then our ability to honour obligations is clearly reducing and we might get a downgrade [at the next review], except of course oil prices recover.” Teriba said in a phone interview with BusinessDay.

An official statement from Nigeria’s Finance Ministry says that the S&P review is just short of a downgrade.

“Nigeria has not been downgraded” writes Paul Nwabuikwu, spokesman for the ministry.

“The country clearly needs to work harder to actualise its recently announced policy response to the current economic challenges. 

“Overall, there are two broad implications. First, the economy, despite many challenges, retains key strengths. Second, we have to keep working harder to continue to turn these strengths into real value for country and its citizens” Nwabuikwu concluded in a news release yesterday. 

S&P’s next ratings release on Nigeria has been set for March 20, few days before the monetary policy committee meeting (March 23-24) and presidential elections (March 28).