Given the recent bombardment of negative assessments regarding the nation’s economic prospects, experts have claimed that the country can see considerable growth provided the Federal Government abides by the rules regarding fiscal discipline and refrains from fulfilling obligations that are beyond of its means.
This is in addition to making deliberate and effective steps to stop supporting deficit-financed projects and to restructure existing debt in order to free the nation from its current debt trap.
Standard & Poor’s, the world’s top rating agency, confirmed Nigeria’s credit rating at “B-/B,” but changed its outlook to “negative,” citing rising threats to the nation’s ability to service its debt over the next two to two years.
This comes roughly a week after Moody’s Investors Service, another rating agency, further lowered Nigeria’s sovereign credit rating from “B3” to “Caa1” and revised the outlook to “Stable.”
According to experts, the downgrading is a reflection of how poorly the country’s financial sector is doing.
They claim that the federal government’s fiscal mismanagement is to blame for the unrest, as it has continued to borrow money domestically and abroad and to loot the central bank through “Ways & Means,” which has eventually increased inflation rates.
Particularly, David Adonri, vice president of Highcap Securities, called the poor rating a catastrophe.
He claims that aside from the fact that investors will lose interest in Nigeria’s sovereign bond due to worry about a default, the value of the naira is also anticipated to decline further due to a lack of dollars to support the value of the currency.
He emphasized that this would cause Nigeria’s bond to trade on the Eurobond market with a high-risk premium.
“Nigeria is in a debt trap, the country needs to issue new sovereign debt to service existing one. If we do not have new issuance, sovereign default is imminent. This might trickle down to the domestic financial market thereby worsening domestic financial instability.”
“The capital market is driven by macro economic conditions. If the macro indicators are bad, it would adversely affect the capital market. A lot of corporates will not have hard currency to drive their operations and the cost would be huge.”
Additionally, he noted that foreign investments in the stock market are probably going to decline, and that there won’t be enough liquidity to support market performance.
Adonri emphasized the need to diversify the economy away from dependency on imports, which necessitates funding in hard currencies, and toward self-sufficiency, which would use native factors of production to spur economic growth.
According to Dr. Uche Olowo, a former president of the Chartered Institute of Bankers of Nigeria (CIBN), if no policy is changed to restructure the economy, the negative sentiments from the rating will worsen the already low level of foreign direct investment in the nation, which will lead to a further decline in foreign capital inflows.
However, he made the point that with the correct policies, which would help close gaps and leaks and minimize corruption, favorable attitudes would be restored.
According to Tajudeen Olayinka, chief executive officer of Wyoming Capital and Partners, when a country’s rating is downgraded by an accredited rating agency, such as S&P, it has an impact on the yields and prices of financial instruments issued by economic agents in that economy.
He claimed that in order to offset the perceived higher risk premium associated with such instruments, investors who were ready to own bonds issued by the government and corporate organizations would want a higher yield.
He urged the government to stop providing gasoline subsidies and Ways and Means advances securitization in order to put the economy back on a path of sustainable growth.
“More affected are debt instruments that immediately attain junk status in the global financial space. Accordingly, the cost of capital goes up in the economy, as a greater number of foreign investors stay away from participating in the country’s financial markets.”
“Naturally, immediate impact would be felt in the foreign exchange market, as the Naira exchange rate suffers further depreciation or devaluation. The downgrade is not good for the economy. It is unacceptable to securitise CBN’s Ways and Means Advances. It is an early warning sign that the federal government may no longer be able to service its debts,” he stated..
