Moody's credit rating; A downgrade that is strongly argued

Proshare

Tuesday, May 10, 2016 8:58AM/FBNQuest Research

Moody’s Investors Service last month downgraded its credit rating for Nigeria’s long-term, foreign currency sovereign obligations from Ba3 to B1, and assigned a stable outlook. This brings Moody’s into line with S&P, which affirmed its equivalent B+ rating in September. Fitch still has the sovereign one notch higher, at BB- (equivalent to Ba3).

However, it has downgraded two other oil producers, Angola and Gabon, to B+, the latter with a negative outlook since Friday. We identify with the Moody’s stance, which is based upon increased external vulnerability, the risks if the FGN is unable to deliver fiscally and mounting debt interest payments.

We like the non-ideological position. Moody’s accepts that the “soft capital controls” have eased some external pressures. Those same restrictions have deterred the foreign portfolio investor, as have the delays in repatriations. We are not so sure, however, that they are to blame for the reported halving of FDI inflows in 2014-15. These transactions are lumpy by definition, have a long lead time and are driven by a long-term view.

The balance of payments has not become a disaster zone. Moody’s sees a current-account deficit this year of 2.3% of GDP. Our forecast is 3.1%.
The mismatch between the supply of, and demand for dollars is set to continue. The pragmatic Moody’s sees a solution in either devaluation or the accumulation of fx reserves or a series of fiscal surpluses.

 

The note observes that, when finalized, the currency swap with China will help tackle the mismatch. It adds that China was the source of one third of non-oil merchandise imports last year. We have been surprised to hear a figure as high as 80% on the circuit, and found a 23% share for all imports in the latest foreign trade report from the National Bureau of Statistics.

 

Moody’s rightly highlights the execution risk attached to the expansionary 2016 budget. It suggests that the target of N1.5trn in FGN independent revenue for this year is to be achieved in full from the establishment of the treasury single account. We had assumed that other revenues were included in the projection, and have often highlighted the aggressive forecast for non-oil revenue generation in 2016.

 

Moody’s also stresses the rising burden of debt service, which it estimates at 23% of revenues for general government this year (and 31% for the FGN). It is confident that the DMO can attract the buyers for new FGN bond issuance, if wary of the cost.

 

The onus therefore falls upon the FGN to boost external concessional financing from bilateral and multilaterals sources. 

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