Standard and Poor (S&P), a global credit ratings agency, has in a recent report, placed the Nigeria’s short-term foreign and local currency sovereign credit worthiness at ‘B-/B’ and Nigeria’s long- and short-term national scale ratings at ‘ngBBB+/ngA-2’. It acknowledged stability of the outlook, and also expressed concern regarding President Tinubu’s administration’s paramount task of effectively handling the ramifications of inflation and currency devaluation. The National Bureau of Statistics (NBS) reports that Nigeria experienced a staggering inflation rate of 28.92% in December, marking the highest level in the past 27 years. Furthermore, throughout 2023, inflation average was 25%.
Furthermore, following the unification of the global currency market in June, the naira has undergone a drastic decline of more than 100%. In recent days, the naira came dangerously close to reaching ₦1500/$ in the official market, prompting intervention from the Central Bank of Nigeria. To regain control, the bank implemented a series of measures, such as lifting the restrictions on exchange rates set by International Money Transfer Operators (IMTOs). During the week, the central bank also resolved approximately $500 million in outstanding debts owed to companies operating within Nigeria, out of the total estimated $7 billion owed.
Capital importation fell by 43.55% to $654.65 million in Q3 2023.
In the medium term, the report acknowledged that President Tinubu’s initial reforms could bring stability to the macroeconomic landscape. However, it cautioned against potential hurdles that may arise from implementing strict monetary controls and decreased investment in productive sectors, as these could negate the advantages of the reforms. The risks include reversing prior methods of turning fiscal deficits into revenue and imposing stricter limitations on currency flows, all while neglecting the adequate allocation of resources towards enhancing productivity and governance in both the oil and non-oil industries.
If Nigeria does not tackle its high inflation and weak balance of payment position, the report highlights that capital flights and currency depreciation will continue to be a problem. In the third quarter of 2023, the country experienced a significant decline in capital importation, falling by 43.55% from $1.16 billion in the third quarter of 2022 to $654.65 million. Furthermore, there was a quarterly decrease of 36.45%, with only $1.03 billion recorded in the previous quarter of the same year. The issue of capital flights, sustain currency devaluation, and maintain high levels of inflation will persist until Nigeria enhance its fundamental balance of payments position.
A potential rating upgrade may occur within the next year.
With the stable outlook, the government’s ability to push through reforms successfully and stimulate economic growth is weighed against the challenges posed by underperforming oil production, which could undermine macroeconomic stability and erode confidence due to inflationary pressures and currency fluctuations. S&P states that a potential rating upgrade may occur within the next year if Nigeria surpasses the firm’s projections in terms of economic performance and makes considerable progress in addressing fiscal and external imbalances. Should risks to Nigeria’s ability to repay commercial obligations escalate, it might lead to a decline in ratings within the next year.
For instance, the decline could stem from a drastic reduction in usable foreign currency reserves, substantial fiscal deficits or debt-servicing requirements, or the reluctance of domestic financial markets to absorb more local currency debt issuance. Unfortunately, due to a lack of a full quorum on the Monetary Policy Committee (MPC), the CBN was incapable of raising rates and effectively tackling the inflationary surge. The report highlights the anticipation of restoring the quorum in early 2024 and implementing a more stringent monetary policy. This strategic move is predicted to effectively alleviate inflationary pressures.
Related Article: Nigeria set to switch to credit-based economy
Gross FX reserves declined to $32.9 billion by the end of 2023, a decrease from $37.1 billion by the end of 2022. As of January 2024, gross FX reserves amounted to $33.4 billion. Despite the existence of current account surpluses, the report shows an expectation of minimal growth in usable FX reserves due to the high demand for foreign exchange in the economy. Its projections suggest that the increase in FX reserves will be constrained by expensive imports and the resolution of foreign exchange arrears. The expected stability of the usable reserves is estimated at approximately $22 billion for the period spanning from 2024 to 2027.