S&P Revises Nigeria Outlook from stable to Negative, cites debt-servicing challenges

Standard and Poor’s on Friday revised Nigeria’s outlook to ‘Negative’ from ‘Stable’ and also affirmed its ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings on the country.

It also lowered its long – and short-term Nigeria national scale ratings to ‘ngBBB-/ngA-3’ from ‘ngBBB/ngA-2’.

S&P said its negative outlook rating for the country “reflects increasing risks to Nigeria’s debt servicing capacity over the next one-to-two years due to intensifying fiscal and external pressures”.

“The outlook revision reflects our view that Nigeria’s debt servicing capacity has weakened due to high fiscal deficits and increased external pressures. These stresses stem from low (albeit recently rising) oil production volumes, large refined-petroleum subsidy costs, high debt service expenditure, and a relatively large planned fiscal deficit in the 2023 budget,” the agency noted in a statement.

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The negative outlook rating came a week after another international rating agency, Moody’s Investors Service, downgraded the Nigerian long-term foreign-currency and local-currency issuer ratings as well as its foreign currency senior unsecured debt ratings, as well as its foreign currency senior unsecured debt ratings to Caa1 from B3 due to the country’s low revenue and high debt profiles.

S&P said its negative outlook could change either way, depending on developments on Nigeria’s fiscal plane.

“We could lower the ratings if risks to Nigeria’s capacity to repay commercial obligations continue to worsen, either because of declining external liquidity or a reduction in fiscal flexibility.”

It noted that this could occur, for instance,” if we see higher fiscal expenditure, higher debt servicing costs, or significantly reduced liquid foreign exchange reserve levels”.

For the upside, it noted that it could revise the outlook to stable “if Nigeria experiences significantly stronger economic performance than we expect, and external and domestic financing pressures prove to be contained, while fiscal deficits decrease faster than we project”.

It further noted that Nigeria’s “limited and expensive” access to international capital markets, and a consequent increasing reliance on significant domestic funding at relatively high-interest rates, is further weighing on net interest costs and the government’s fiscal position.

S&P noted that Nigeria will hold general elections on February 25, observing that “a close three-way presidential race is being fought”. It said all three leading presidential candidates have pledged significant reforms, but they will inherit a deteriorating fiscal story.

It said there may be “some sporadic violence in the run-up to and during the presidential elections in February,” but expects a broadly smooth democratic transition between the governments as President Muhammadu Buhari will complete his second term in May and stand down.

“We expect the new government to undertake structural reforms, but these will likely take time,” it said.

The rating agency said Nigeria’s external buffers are also under pressure.

It said rising prices of imported goods, payments to clear foreign exchange (FX) backlogs, the Central Bank of Nigeria’s (CBN’s) intervention in the FX market to stabilize the naira (NGN), and low oil volume exports reduced gross foreign exchange reserves by about $3 billion in 2022, reaching $38 billion by year-end.

The agency said it lowered its estimate of usable reserves to $28 billion for 2023 to account for what S&P Global Ratings estimates to be encumbered reserves of about $10 billion.