Negative ‘junk’ rating tightens Nigeria’s borrowing window

By Moses Obajemu

Nigeria’s window for easy borrowing from international lenders may have further tightened following the junk rating assigned to the country by one of the leading global rating agencies, Standard & Poor’s. Nigeria has largely relied on borrowings from the international markets in recent years to fund its development programmes.

The global rating agency downgraded Nigeria’s credit rating further into junk territory on weak external position linked to the oil price crash.

Nigeria’s long-term rating was lowered from B to B- (short-term still B) and S&P said the federal government’s policy responses are unlikely to be enough to mitigate the effect of lower oil prices which will hurt Nigeria’s external and fiscal positions and put further pressure on the foreign exchange reserve.

Junk bonds are typically rated ‘BB’ or lower by Standard & Poor’s; B is a notch lower than BB and a speculative grade.

S&P had in early March lowered its outlook on Nigeria from “stable” to “negative” after Moody’s and Fitch slammed lower ratings on the country.

The latest down grade of B-, is only one notch above CCC which would mean that Nigeria is currently highly vulnerable to non-payment and S&P expects default to be a virtual certainty, regardless of the anticipated time to default.

Mexico, Oman, Angola, Kuwait, and Trinidad and Tobago also suffered a downgrade while S&P shifted outlooks on Colombia and Bahrain to negative.

Analysts at United Capital hold the view that it would be difficult for Nigeria to borrow because the low rating would send wrong signals to creditor nations that Nigeria could default in its debt servicing obligations because of its thin and low revenue base

Toeing the same line of argument earlier, analysts at Afrinvest and United Capital had said the falling oil prices would worsen the fiscal position of the federal government.

“The implication of lower oil price would be an expansion in fiscal deficit beyond our projected N4 trillion which is 1.8 times the federal government’s forecast of N2.2 trillion,” analysts at Afrinvest said.

In addition, they said weaker oil prices and the flight of foreign capital to safer havens means there is poor prospect for reserves accretion.

The federal government had proposed to finance the deficit budget through borrowing which appears to be getting increasingly difficult now because creditors take into account sovereign ratings before granting credit to nations.

The federal government which previously predicated the 2020 budget on crude oil benchmark of $57 per barrel, had to adopt $30 per barrel following the crash of oil prices. It also reduced the size of the budget by $1.5 trillion. But oil prices are still down at below the adjusted benchmark.