On March 26 Standard & Poor (S&P) lowered its long-term foreign and local currency sovereign credit ratings on Nigeria to ‘B-‘ from ‘B’. The ‘B-‘is a junk or speculative status as it is below the investment grade threshold. At the same time, the company affirmed its ‘B’ short-term sovereign credit ratings on the country. S&P however confirmed a ‘stable outlook’ for the country. The stable outlook reflects that at this lower level, risks to the ratings on Nigeria will be balanced over the next six to twelve months.
Citing the rationale for its rating decision; the company wrote: “Significantly lower international oil prices following the collapse of the OPEC+ deal on March 6, and lower demand tied to the corona virus pandemic, have led us to sharply revise down our forecast for oil prices. Lower oil prices will hurt Nigeria’s external and fiscal positions in the near term, and the administration’s policy responses are unlikely to be enough to mitigate the decline in oil revenue, and foreign-exchange reserve levels are likely to come under pressure.”
What does this mean for Nigeria? Since a sovereign credit rating is an independent assessment and evaluation of the credit worthiness of a country or sovereign entity; the lowered rating assigned Nigeria means the level of her credit worthiness has reduced in the eyes of foreign investors. And that the risk involved in investing in Nigeria’s sovereign bonds has gone up. As a result of this, it will cost Nigeria more to borrow in the international debt market than otherwise should have been. And her existing Eurodollar bonds will have increased yields as a result of a likely sell off.
There is an inverse relationship between the price of a bond and its yield. Nigeria’s vulnerabilities to external shocks have heightened in the recent weeks. The key lubricant to grease the Nigeria’s economic machine (its public finance) both at national and state levels is oil revenue. The collapse of the international oil price has however put Nigeria’s financial conditions in a difficult and strained situation. Nigeria has some unsold oil on the high sea. And the current level of oil price does not encourage further exploration and production in the country’s upstream sector. Therefore, a continued worldwide slump in global aggregate demand caused by the COVID-19 pandemic will further hit Nigeria’s finances. The situation will also pile pressure on the country’s foreign reserve. Oil accounts for about 65-70% of Federal Government revenue and about 80-90% of about 29 states’ total income.
A serious hit on oil price, as is the case now, would affect all Nigerians. Most oil exporting countries have their sovereign rating cut by S&P, with varying impact. Some oil-dependent countries such as Saudi Arabia and Russia still have their sovereign ratings intact. The key reasons for such exceptions are that: both countries have huge fiscal buffers to absorb the oil shock for an extended period of time. Both countries have above $500 billion in foreign reserves respectively and this is apart from their Sovereign Wealth Funds, also in the region of billions of dollars. Saudi Arabia’s foreign reserve is so huge that it has been maintaining a currency peg to a dollar for more than three decades.
The per capita foreign reserve for Saudi Arabia is about $14,000; Russia is about $3,800 and Nigeria is about $180. The Nigeria foreign reserve is in the mid-thirties billion dollars. The Central Bank of Nigeria (CBN), adjusted the Naira exchange rates recently in a quick response to the oil price shock. It moved the official rate from N305/$1 to N360/$1 and the Import and Export (I&E) rate to N380/$1 from about N364/$1. The I&E window is the market trading segment for investors (mainly foreign), exporters, end-users that allows foreign exchange transactions to be made at exchange rates determined based on the prevailing market circumstances and conditions.
Though the CBN called the action it took on March 21, 2020 an adjustment; most market watchers nonetheless believe it is devaluation. The CBN is even expected to take further action should the price of oil fail to improve in the near term. The apex bank has hinted that the triggering point for a major action is when the foreign reserve touches the $30 billion mark or below. But it would nice for Nigerians if the foreign reserve does not fall to the triggering threshold. Other credit ratings assigned Nigeria by key credit rating agencies are: Moody’s, which was last maintained at B2 with Negative Outlook. Fitch was last set at B+ with negative outlook. The next scheduled rating publication by S&P on the sovereign rating of Nigeria will be released on August 28, 2020.
Shola Ogunniyi, a Risk Advsior, is The Explainer’s Economy Analyst. He tweets at @Obzzzy.