Nigeria’s fiscal and monetary policy makers would be subject to increased credit rating reviews from foreign organizations unless they come up with creative solutions to the country’s economic problems.
According to a story in The Guardian, Moody’s Investors Service has lowered Nigeria’s long-term issuer ratings in both local and foreign currencies as well as its foreign currency senior unsecured debt ratings from B2 to B3, putting them under evaluation for potential additional reductions.
In response, Kelvin Emmanuel, the Chief Executive Officer of Dairy Hills Limited, stated that one of Nigeria’s challenges is translating the Central Bank of Nigeria’s (CBN) ways and means (W&M) into a 40-year bond.
Regarding the implications of this grade, he stated: “Oil sales generate no income. The primary reason for the declining sovereign rating is due to this. At a time of global oil price rise triggered by geo-political tension, the Nigerian National Petroleum Company Limited has pursued a programme of unverifiable under-recovery payments in a direct sale direct purchase (DSDP) programme.”
Emmanuel predicts that even as investors seek to hedge the risk of default and price in inflation to the yield curve, the yields on Federal Government bonds will increase from an average of 13% to between 17% and 20%. This is due to the fact that B3, a not-primed issuer rating, is categorized as a lower investment grade and is four steps away from junk status, the speaker claimed.
The head of Dairy Hills claims that the Buhari administration’s determination on pursuing a fiscal plan that has relied on loans that not only increase the ratio of government revenue to debt servicing but also violate section 38 (3) of the CBN Act as modified in 2007 poses an institutional risk. He claimed that this culture had the ability to devalue the currency and raise Nigeria’s credit default swap from its present level of 990 basis points.
Going back in time, Emmanuel noted that at 8.2% inflation and 6.1% GDP growth in 2006, it would take 8.7 years to double inflation and devalue the currency by 100%, while it would take 11.6 years to double GDP. This was the basis for the former minister of finance, Dr. Ngozi Okonjo-Iweala, to rebase Nigeria’s GDP in 2011.
“Today, at a 20.77 per cent inflation rate, and 3.54 per cent GDP growth, you will need only 3.4 years to double the inflation rate, and devalue the currency by 100 per cent. Meanwhile, you need 20.3 years to double the size of Nigeria’s GDP – a clear signal that the country has regressed significantly.”
He claimed that the Nigerian National Petroleum Company Limited’s recovery of the four-kilometer Forcados pipeline may be helpful in the near future and that the recovery also serves as evidence that oil theft is an organized crime.
“The discovery of a four-kilometre pipeline that stretches 2.5 miles from the forcados terminal into the ocean, and has been operational for the last nine years, and has contributed to the 600,000 barrels of crude oil stolen daily in Nigeria, impacting on the inability of the country to deliver its daily production quota promised to OPEC, is a proof that oil theft in Nigeria is organised crime, sanction by certain rogue elements close to the corridors of power.”
According to Emmanuel, if the Nigerian government continues on its current course and fails to amend the finance act to increase the revenue-to-GDP ratio from the current 7%, adopt significant cost-cutting measures, heed recommendations to end the PMS subsidy, and adopt a free-floating exchange rate mechanism, the nation will be exposed to risks that could have far-reaching detrimental effects on the economy.
According to Emmanuel, if the Nigerian government continues on its current course and fails to amend the finance act to increase the revenue-to-GDP ratio from the current 7%, adopt significant cost-cutting measures, heed recommendations to end the PMS subsidy, and adopt a free-floating exchange rate mechanism, the nation will be exposed to risks that could have far-reaching detrimental effects on the economy.
Professional in the oil and gas industry Jide Pratt stated that the downgrade is not unexpected and that it is based on how they interpret the fiscal policies and FX crisis. Because of the challenges with availability, the confidence in investment and exchange rates to complete these transactions is not improving.
The fact that there is a concern over poor oil production was also mentioned by Pratt, who also serves as the Chief Operating Officer of Aiona Nigeria.
According to him, the CBN’s top priority right now is to create an environment that will encourage foreign direct investments (FDIs) and lead to an immediate recovery of the economy.
