A Closer Look At Moody's Report on Nigeria's Ratings


Friday, December 06, 2019 / 07:25 PM / By Adesola Borokinni, Proshare Research / Image Header Credit: Wikipedia

Moody's Investors Service, one of the global credit rating agencies, in its most recent report, changed its outlook on Nigeria's credit ratings to negative from stable. Moody's affirmed its B2 long-term local and foreign currency issuer ratings, the B2 foreign currency senior unsecured ratings, and the (P) B2 foreign currency senior unsecured MTN program rating on the country. According to the rating agency, the negative outlook reflected Moody's view of increasing risks to the government's fiscal strength and external position.

The report sends a strong signal to prospective investors who would have otherwise loved to take advantage of the huge market size of the Nigerian economy. The report expressed concerns that the country's weak government finances will worsen. The report further noted that the government would likely resort to increasingly opaque and costly options to finance a rising debt burden.  The increased vulnerability of the economy to changes in capital inflows would see a deteriorating outcome for Nigeria's foreign reserves (see chart 1 below). 


The Trouble With FX

A major concern raised by Moody's report is the increase in the Nigeria foreign portfolio attributable to high increasing yields in bonds and government securities, so it has to attract foreign investors and stabilize the naira. The economy's increasing reliance on FPI is costly and increases the exposure of Nigeria's foreign reserves to external and domestic shocks. The central bank needs to prioritize its objectives and revisit its primary and secondary objectives. The monetary authorities, as far as foreign analysts are concerned, should not be concerned with exchange rate stability if such stability comes at the cost of crowding out private sector investment, thereby increasing the vulnerability of the economy to external and domestic shocks.


Chart 1 Nigeria's Foreign Reserves January-November 2019

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Source: National Bureau of Statistics, Central Bank of Nigeria


Moody's recent report has identified the upward trajectory of Nigeria's debt profile as an issue that needs handling. Debt has accumulated quickly over the last four years, almost tripling to an estimated N33trn (23.2% of GDP) in 2019 from N12.6trn (or 13.2%) in 2015. Analysts have expressed heightened fears about the Federal government's request for approval for an additional $29.9 bn loan to meet up with Nigeria's infrastructural gap in transportation, electricity and roads (see chart 2 below).

Chart 2 Nigeria's External Debt Level 2011-June 2019

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Source: National Bureau of Statistics (NBS)

The questions that pop into the minds of average Nigerians would be; how judiciously will the loan be used? What are the terms and conditions of the loan? What are the intended sources of loan repayment? What are the immediate and long-term effects of the loan on their lives? Regardless of the claims of the minister of finance that Nigeria is not in debt distress, financial observers are still uncomfortable with the economy's debt vulnerability (the debt service to revenue ratio is currently above 60%).


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Priming The Revenue Pump

The Moody report observed that there was a need for the Nigerian economy to expand much faster, especially concerning its annual revenues. The rating agency forecasts that Nigeria's revenue will remain around 8 percent of GDP until 2022. To improve its revenue sources, the federal government has embarked on tighter fiscal policy, such as an increase in V.A.T to 7.5% (from 5%), and an increase in the tax net, as Nigeria has one of the lowest tax to GDP ratios in the world. Local economists note that to avoid the adverse impact of excessive borrowing on future generations of Nigerians, the fiscal authorities need to resist the temptation of resorting to additional external borrowing to finance growth.

Moody's report noted the "sluggish" growth in the Nigerian economy, which brings to mind the following questions; How aggressive is the government in pushing GDP growth rate above population growth? What is the government doing wrong in its macroeconomic management? How can it right the wrongs?

Nigeria's local news media recently reported that each of the 36 states of the federation (including Abuja FCT) made a habit of paying significant pension outlays to former state executives (and in the case of Abuja, FCT Ministers).  Against the background of ballooning recurrent public sector expenditures, it appears necessary for the different levels of governments to cut back on the cost of governance. Analysts have also argued that both the States and federal governments privatize their state-owned enterprises (SOEs) to re-invest cash generated from such sales into self-sustaining infrastructure.

Nigeria's relatively slim GDP growth (GDP grew by 2.28% in Q3 2019) is evident (see chart 3 below), considering the economy's dependence on a struggling oil sector, which has worsened over time.  Although various administrations have come up with plans to diversify the economy away from a softening oil sector to other sectors, these plans have been ineffective in the face of a weak agricultural value chain. The local agricultural value chain has failed to link agriculture to an overall concept of efficiency and productivity. 


Chart 3 Nigeria's GDP Growth (%) Q1 2018 -Q3 2019

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Source: National Bureau of Statistics (NBS)

Moody's report noted reservations as regards continuation of the current heterogeneous monetary policy mix of the central bank-including the rationing of the supply of U.S dollars in the economy while suppressing part of the demand for foreign currency aimed at supporting domestic production and job creation over the long term, describing it as a policy that will constrain growth over the short to medium term. To be sure, no economy has ever survived using a policy of autarky or economic isolation.

Evaluation of the country's "temporary" border closure and forex restriction, at first glance, presents itself as a step in the right direction, but analysts have noted that the government policymakers should be more concerned about improving domestic productivity and developing competitive advantage, than engaging in restrictive trade practices.

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Moody evaluation and the common man

The government's policies so far have had minimal impact on the average Nigerian citizen, and this poses a serious socioeconomic problem. The poverty level, unemployment rate (23.1% in Q3 2018) and misery index for Nigeria are troubling. There is a high degree of correlation between the unemployment rate and the rate of crime.

 The Moody report equally observed that the Nigerian economy was at risk of social unrest on the back of low average income levels, high rates of urban and rural poverty and worsening income inequality. Indeed, if no attention is addressed to a growing sense of frustration amongst the general population, Nigeria could witness mass protests similar to those in countries like Iraq, Venezuela, Lebanon and Chile with similarly unhelpful outcomes.

According to the report, Nigerian policymakers need to pay closer attention to the impact of policies on the average citizen and not just their impacts on the local elite.


The Way forward

A major takeaway from the recent downgrade of the country's credit rating by Moody is that certain policy actions are needed to protect social and economic stability, amongst which include the following;

  • Encourage innovation and invest massively in entrepreneurship.
  • Focus and develop a competitive advantage in trade and agriculture.
  • Mobilize investment that could provide a larger number of jobs.
  • Generate more sources of local revenues
  • Reduce recurrent expenditure; reduce the general cost of governance, and privatize unprofitable state-owned enterprises (SOEs).
  • Embark on radical structural transformation of the economy, i.e. infrastructure.
  • Ensure proper fiscal management.


The Moody report suggests that the fiscal and monetary authorities in Nigeria need to urgently review policy in the light of their adverse impact on economic growth and employment. How far they can go would depend on how far their aspirations can carry them, so far, the prognosis has not been glowing.


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