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A Sovereign Downgrade from Moody’s

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Thursday, November 09, 2017 / 10:48AM /FBNQuest Research

Moody’s Investor Service has downgraded its sovereign rating for Nigeria from B1 to B2, and so falls into line with S&P. Fitch has the sovereign one notch higher at B+ (the equivalent of B1), albeit with  a negative rating. 

The downgrade is justified by Moody’s by the limited progress made the authorities in tackling the Achilles heel of the economy, namely its dependence on oil revenues. The progress has been limited although we would add that it has been patchy or worse over the past four decades.

Moody’s also highlights the dire position of revenue collection, noting that the budget deficit amounts to roughly half total general government revenue (not FGN revenue), which compares poorly with the median of its B-rated sovereigns. 

It also sees the alarm bells ringing on debt service, which it puts at 38% of revenues in H1 2017. This ratio appears to be for FGN revenues, for which the IMF has a rather higher figure. 

On capital expenditure, Moody’s queries whether in 2017 the FGN will be able to better the N1.2trn it reported for 2016. This reflects the struggle over revenue collection but, more substantially, its view that the budget cycle for 2017 will be six months because the new budget will be passed in January. We fear that this view understates the long-established tensions between the executive and the legislature. 

The new rating has a stable outlook due to the improvement in the oil price, the relative stability in the Niger Delta, the return of the current account to surplus, the accumulation of official reserves and the net inflow of capital under the CBN’s multiple currency practices. 

A ratings agency has to perform a delicate balancing act. In this case, Moody’s has termed the likelihood of a fresh external shock as low but proceeded with the downgrade nonetheless in view of the limited progress in overcoming the structural weaknesses of the economy. 

Investors will form their own view on the balancing act when the FGN returns shortly to the Eurobond market. We suspect that the downgrade will not have a great impact in a market where other sovereigns have been able to sell rather weaker credit stories. 

The agency’s forecasts for 2017 differ somewhat from our own: GDP growth of 1.7% (we have 2.0%); end-year inflation of 14.4% y/y (16.2%); and a current-account surplus equivalent to 1.8% of GDP (0.3%). 

Proshare Nigeria Pvt. Ltd.

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