Why S&P affirmed Nigeria’s rating with stable outlook

Standard and Poor’s (S&P), a global rating agency, has affirmed its ‘B-/B’ long- and short-term foreign and local currency sovereign credit ratings on Nigeria.

In a statement on Friday, the agency also affirmed its ‘ngBBB+/ngA-2’ long- and short-term Nigeria national scale ratings. “The outlook is stable.”

Last August, it revised its outlook on Africa’s biggest economy to stable from negative, citing the government’s recent reforms which the agency believes could benefit the country’s growth and fiscal outcomes if delivered.

Read also: S&P Global Rating Upgrades Nigeria-Based Seplat To ‘B’ in anticipation of strong full year performance

“The stable outlook balances the government’s capacity to continue the reform agenda, which, if delivered, should support growth and fiscal outcomes, against below-potential oil production and risks to macroeconomic stability and confidence from inflationary pressures and a volatile currency,” the statement said.

It said on a downside scenario, it could lower the ratings over the next 12 months if we see increasing risks to Nigeria’s capacity to repay commercial obligations.

“This could arise, for instance, from significantly reduced usable foreign currency reserves, much higher fiscal deficits or debt-servicing needs, or because domestic financial markets are unwilling to absorb additional local currency debt issuance.

“We could raise our ratings over the next 12 months if Nigeria’s economic performance significantly exceeds our forecasts, and fiscal and external imbalances improve significantly,” the statement added.

Another global rating agency, Fitch in November also affirmed the country’s long-term foreign-currency issuer default rating at ‘B-‘ with a stable outlook, citing the reforms.

President Bola Tinubu in May scrapped a costly but popular petrol subsidy and lifted currency controls in June, which he said was to save the country from going under.

But his actions have worsened inflation currently in double-digits and at the highest level in at least 20 years. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

According to the National Bureau of Statistics (NBS), the country’s inflation rate, a measure of the general price level in double digits since 2016, rose to 28.92 percent in December from 28.20 percent in the previous month.

In the third quarter of last year, foreign investments in Nigeria dropped to $654.7 million, the lowest level since the NBS started collating the data in 2013.

Since June, the naira has continued to depreciate against the dollar and other major foreign currencies.

The official exchange rate fell from N463.38/$ to N1,348.6/$ as of January 29. At the parallel market, the naira is now pushing above N1,500/$ from 762/$.

“Since coming to power in end-May 2023, the Tinubu administration has launched a series of important monetary, economic, and fiscal reforms, including the liberalisation of the naira and the elimination of the fuel subsidy, and taken steps to boost non-oil revenues and increase domestic refining capacity,” the S&P report said.

It said while it believes these policies should benefit Nigeria’s creditworthiness over the long run, managing the current effects on inflation and the exchange rate remains challenging.

“We expect Nigerian economic growth to average 3.3 percent over 2024-2027 (roughly 1 percentage point above population growth). While reforms will improve growth in the later years of our forecast period, in 2024, tightening monetary and fiscal policy could dampen growth potential.

“Growth in terms of GDP per capita will remain low, partly reflecting the country’s high population growth as well as the recent depreciation of the Nigerian naira. Increasing digitisation tied to the pandemic boosted growth rates in sectors like insurance, finance, and information and communication; innovation and entrepreneurship are relatively high in these areas,” it added.

The authors of the report cited that Nigeria’s internal security has deteriorated over the past several years, with banditry, kidnappings, and general instability having increased.

“Nevertheless, we do not expect the overall security situation to immediately improve, as high unemployment, inflation, and rising poverty levels have stagnated social development, fueling militancy,’ they said.

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