Nigeria’s Bonds Drop After Moody’s Rating Downgrade
Monday sees the sharp decline of Nigeria’s government bonds due to Moody’s downgrade from B3 to CAA1 on Friday. This new rating is Nigeria’s worst-ever credit rating in over 17 years from Moody’s. Moody’s downgraded Nigeria’s rating due to the expected worsening of the government’s fiscal and debt position.
In their report, it was noted that Nigeria’s government faces strong fiscal pressure and limited ability to respond due to institutional weaknesses and social challenges. Reviewing the data on Tradeweb, the longer-dated bonds were down the most and the dollar-denominated 2051 Eurobond fell more than 2.8 cents in the dollar to 68.758 cents while the Eurobond maturing this year recorded the least decline.
Viktor Szabo, an emerging market portfolio manager at Abrdn, noted “That is a significant move because there will be a lot of forced selling.” He added, “Pension funds don’t like to have names that are defaulting or even close to defaulting.”
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As Nigerian bond prices fell, it increased the demand for Nigerian debt by premium investors, and the bonds jumped by 46 basis points.
As the bond prices tumbled, the premium for holding Nigerian debt over US Treasuries rose by 46 basis points to 777 basis points. Nigeria’s bonds have outperformed other African and emerging market issuers in the last 6 months, according to JP Morgan.
According to Moody’s, the rationale for the rating was due to Nigeria’s deteriorating fiscal and debt position, as well as the likely erosion of Nigeria’s external profile. The report noted, “Depressed and uncertain oil production, capital outflows amid a flight to quality, and the government’s constrained access to external funding will likely continue to weigh on Nigeria’s external position in 2023.”
In the report, Moody’s predicted Nigeria’s limited ability to finance core spending that will lead to debt service conflicting with other spending priorities. The report also noted that debt interest payments in Nigeria will consume up to half of the government revenue.
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Moody’s gave Nigeria a stable outlook considering post-election reform potential vs persisting fiscal pressure and slow policy implementation amid socio-political challenges. It was noted, “It will likely take time for the new President to form a government and establish its policy agenda, and eventually start reversing the ongoing fiscal deterioration.”
The report also noted, “The capacity of the government to reduce its fiscal deficit in the shorter term is limited, but the debt amortization profile remains favorable for now, providing a time-window for the government to consolidate its fiscal position and foster confidence.”
In 2022, Nigeria spent about $10 billion on fuel subsidies, even as the government has budgeted N3.36 trillion for fuel subsidies in 2023. Different stakeholders have criticized the government’s continued involvement in oil subsidies in the face of dwindling government revenue and a deteriorating debt profile.
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Moody’s also gave Nigeria a very negative ESG credit impact score (CIS-5). According to the report, there is a high carbon transition risk in Nigeria due to heavy dependence on oil for the public sector and economy (80% of merchandise exports from oil earnings) hence Nigeria’s E-5 issuer profile score.
Nigeria also received an S-5 issuer profile score due to high exposure to social risks in the country. And the country received a highly negative governance profile score (G-5 issuer profile), the report cited “weak control of corruption and rule of law”, “very weak fiscal and monetary policy effectiveness”, and “opaque management of resources”.