S&P revises Nigeria’s Economic outlook to negative on forex risk

S&P Global Ratings has revised Nigeria’s economic outlook to negative from stable due to the rapid decline in the country’s external reserves.

In its outlook on Nigeria released on Monday, the global rating agency said about a third of the country’s foreign-exchange reserves (put at $12 billion) are derived from offshore investors who pilled to Nigeria’s debt.

S&P is of the view that Nigeria’s forex buffer is largely dominated by non-resident holders of the Central Bank of Nigeria (CBN) Treasury Bills made the country to be “vulnerable to a change in investor sentiment.”

“These holdings could be subject to changes in foreign investor sentiment and a potential sell-off, thereby creating risks to current reserve levels.

It said given these risks, we have added CBN bills to general government debt. “Therefore, our estimate of general government debt, net of liquid assets, now stands at an average of 39 percent of GDP in 2020-2023.”

“As a consequence of these pressures, we are revising the outlook to negative from stable,” the global rating agency said. “Nigeria’s economic growth remains weak, slower than that of several peers at a similar rating level. Weak growth, sizable public debt, and external pressures are all weighing on Nigeria’s creditworthiness,” the global rating agency said in its report on Nigeria.

“The negative outlook over the next six-to-12 months reflects the balance of the risks from further foreign exchange (FX) pressures, ongoing weak economic performance, as well as rising government domestic and external debt.

“We may lower the ratings if Nigeria’s international reserves decline markedly, external debt rises significantly faster than our current assumptions, or if our projections of gradual fiscal consolidation do not materialize,” S&P said.

It said it could raise Nigeria’s ratings if the West African country’s economic performance were to strengthen significantly, foreign exchange reserve levels rose, or if fiscal deficits were to reduce faster than we project.