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Experts – Nigeria bonds head toward a slump

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By Usman Oladimeji

Fiscal and monetary policy regulators needs to devise counter measures.

Moody’s investor service, a bond credit rating corporation, has downgraded Nigeria’s local currency and foreign currency long-term issuer ratings to B3 from B2 and has also lowered its rating on the country’s foreign currency senior unsecured debt ratings to B3 from B2, placing both ratings on review for further downgrade. According to Moody, the severe decline in the government’s financial condition and its external position were the primary factors that led to the downgrading of the rating.

Additionally, Moody asserts that said financial and capital outflows from Nigeria exceed its current account surplus. He attributed the review for downgrade to the risk that the ongoing fiscal and external deterioration accelerates, further weakening the government’s capacity to service debt and thereby increasing its risk of default. The corporation ranks the creditworthiness of borrowers using a standardized rating scale which measures expected investor loss in the event of default and rates debt securities in several bond market segments.

Current government bond rate is predicted to rise.

Speaking on the report, Chief Executive Officer of Dairy Hills Limited, Kelvin Emmanuel, said; converting the Central Bank of Nigeria’s (CBN) Ways and Means (W&M) to a 40-year bond is part of the factors contributing to the challenges in Nigeria. He explains that oil sales generate zero revenue, which is the primary cause of the low sovereign rating. The Nigerian National Petroleum Company Limited has pursued an unverifiable under-recovery payment in a direct sale direct purchase (DSDP) programme at a time when oil prices worldwide have risen due to geopolitical instability.

Emmanuel predicts that Federal Government bond rates will rise from their current average of 13% to 17-20% as investors price inflation into the yield curve and hedge default risk. B3 is a not-primed issuer rating, putting it in the lowest investment grade, four levels above trash. He argues that the Buhari administration’s fiscal strategy, which relies on loans that raise the debt servicing to government revenue ratio and violate CBN Act section 38 (3), is an institutional risk that could raise Nigeria’s credit default swap from 990 basis points while also debasing the currency.

The country is unable to benefit from increasing oil prices.

While referring dates back, Emmanuel claimed that in 2006, at 8.2 percent inflation and 6.1 percent GDP growth, it would take 8.7 years to double the inflation rate and devalue the currency by 100 percent and 11.6 years to double the GDP by 100 percent, which was the basis on which Dr Ngozi Okonjo-Iweala rebased Nigeria’s GDP in 2011. Presently, at a 20.77 percent inflation rate and 3.54 percent GDP growth, it would take 3.4 years to double the inflation rate and devalue the currency by 100 percent. Nigeria’s GDP doubled to 20.3, a shred of solid evidence that the nation has degraded.

Moody’s said Nigeria, as an OPEC member, hasn’t benefited from rising international crude-oil prices. He said the dramatic reduction in oil output in 2022 and the prolongation of the costly oil subsidies have almost entirely offset the boost to government income and exports that would otherwise have been expected from higher oil prices. Jide Pratt, an oil and gas professional, in his remarks, said the downgrade is based on their forecast of the fiscal policy and FX crisis. Due to the availability concerns, investor trust and exchange rate for completing these deals are deteriorating.

Nigeria needs to take necessary measures to boost the economy.

He said the CBN’s priority is fostering an atmosphere encouraging foreign direct investments (FDIs) to revive the economy rapidly. Ultimately, Emmanuel concludes that the Nigerian government faces risks that could have far-reaching negative consequences for the economy unless it changes course, amends the finance act to raise the revenue-to-GDP ratio from the current 7%, adopts widespread cost-cutting measures, follows recommendations on stopping the PMS subsidy, and adopts a free-floating exchange rate mechanism.

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