Nigeria deeper in junk territory
S&P GLOBAL Ratings downgraded Nigeria further into junk territory just as the country prepared to issue its first eurobond since 2013, amid low oil prices and a severe shortage of foreign exchange.
S&P lowered Nigeria’s rating one level to B, five levels below investment grade and in line with Kyrgyzstan and Angola. The outlook was changed from negative to stable.
“Nigeria’s economy has weakened more than we expected owing to a marked contraction in oil production, a restrictive foreign exchange policy and delayed fiscal stimulus,” S&P said on Friday.
While government debt remained low, “servicing costs as a percentage of general government revenues are high and rising”, the company said.
The rating cut comes as Nigeria prepares to issue a dollar bond before the end of the year. The Debt Management Office asked banks wanting to manage a $1 billion (R14bn) deal to place bids by today.
Credit deterioration
Yields on the nation’s $500 million of securities due in July 2023 fell almost 280 basis points to 6.63 percent since peaking at 9.4 percent on January 18. The bonds returned 14 percent this year, compared with the average of 16 percent for sub-Saharan African sovereign dollar debt, according to Bloomberg.
“The deterioration of the Nigerian credit has been going on for years,” said Jan Dehn, the head of research at Ashmore Group. The country needed to show progress opening its markets and letting the naira trade freely.
The downgrade is the latest blow to the economy, which shrank in the last two quarters and is headed for its first fullyear recession since 1991, according to the International Monetary Fund.
While President Muhammadu Buhari’s government announced a record budget for this year to stimulate the economy, it was struggling to finance infrastructure projects, and pay civil servants’ salaries.
“An economy in recession and with a devaluation means something is wrong,” said Babajide Solanke, an analyst at FSDH Merchant Bank.
“The downgrade is justified”, and would make Nigeria’s foreign and domestic bonds less attractive. Investors would be concerned about the risk posed by falling oil prices on the government’s ability to pay back the debt, he said.
Nigeria has seen government revenue squeezed by the fall in global oil prices to roughly half their levels from 2014. In addition, attacks claimed by militants in the oil-producing Niger River delta region pushed monthly crude exports to the lowest in 27 years in May.
Positive growth
S&P expected Nigeria’s economy to contract 1 percent this year before returning to growth. Real gross domestic product (GDP) was likely to expand 2 percent next year and 4 percent the following year, it said in the statement.
“We believe that since passing the fiscal budget, government spending together with liberalisation of the interbank foreign exchange market, may boost the economy and spur positive GDP growth next year,” S&P said. Oil output might improve in the fourth quarter as government negotiated with militants and vandalised pipelines were repaired, it said.
Moody’s Investors Service and Fitch Ratings each downgraded Nigeria to four levels below investment grade in the first half of the year. – Bloomberg
An economy in recession with a devaluation means something is wrong.