One of the leading global rating agencies, Standard & Poor’s (S&P), has downgraded Nigeria’s credit rating further into junk territory with a B- rating, down from “B/B,” on the country’s weak external position linked to the plunge in oil prices. This was a one-notch downgrade.
S&P Global Ratings downgraded Nigeria further into junk territory just as Africa’s most populous nation prepares to issue its first Eurobond since 2013, amid low oil prices and severe shortages of foreign exchange. S&P lowered Nigeria’s rating one level to B, five levels below investment grade and in line with Kyrgyzstan and Angola. The outlook was changed from negative to stable.
Under the American financial services company’s rating, the ‘B’ rating is more vulnerable than the ‘BB’ rating, even though the sovereign has the capacity to meet its financial commitments. However, adverse business, financial, or economic conditions would likely impair the country’s capacity or willingness to meet its financial commitments.
Nigeria’s long-term rating was lowered from B to B- (short-term still B) and S&P said the FG’s policy responses are unlikely to be enough to mitigate the effect of lower oil prices which will hurt Nigeria’s external and fiscal positions and put further pressure on the foreign exchange reserve.
Junk bonds are typically rated ‘BB’ or lower by Standard & Poor’s; B is a notch lower than BB and a speculative grade. S&P had in early March lowered its outlook on Nigeria from “stable” to “negative” after Moody’s and Fitch slammed lower ratings on the country. The latest down grade of B-, is only one notch above CCC which would mean that Nigeria is currently highly vulnerable to non-payment and S&P expects default to be a virtual certainty, regardless of the anticipated time to default.
The latest downgrade came after the International Monetary Fund (IMF) Executive Board adopted some immediate enhancements to its Catastrophe Containment and Relief Trust (CCRT) to enable it provide debt service relief for its poorest and most vulnerable members in the wake of the COVID-19 crisis, which has taken a huge toll on the global economy.
The IMF noted that although the greatest health impact had been in advanced economies, emerging market and developing countries, especially low-income countries, would be particularly hard hit by a combination of a health crisis, a sudden reversal of capital flows and a sharp drop in commodity prices.
To this end, the Fund said “many of these countries need help to strengthen their crisis response and restore jobs and growth, given foreign exchange liquidity shortages in emerging market economies and high debt burdens in many low-income countries.”
The CCRT enables the IMF to deliver grants for debt relief benefitting eligible low-income countries in the wake of catastrophic natural disasters and major, fast-spreading public health emergencies. The COVID-19 outbreak and the associated global economic turmoil, according to the Fund, created a critical need to support the Fund’s membership, including exceptional balance of payments support for the poorest members especially impacted by the pandemic. According to the Washington based agency, well-targeted support would allow these countries to prioritise medical spending and health-related as well as other immediate needs in the challenging economic environment, characterised by sharp declines in income, lost revenue and higher expenses.
“In that context, the IMF Executive Board has approved changes to the CCRT that expand the qualification criteria to better cover the circumstances created by a global pandemic and to focus on delivering support for the most immediate needs. Specifically, the decision will allow all member countries with per capita income below the World Bank’s operational threshold for concessional support to qualify for debt service relief for up to two years. This would apply when a life-threatening global pandemic is inflicting severe economic disruption across the Fund’s membership and is creating balance of payments needs on such a scale to warrant a concerted international effort to support the poorest and most vulnerable countries,” the Fund said in a statement yesterday.
The IMF has also launched a fund-raising exercise that would enable the Trust to provide about $1 billion for the current pandemic. The Managing Director of IMF, Kristalina Georgieva has called upon the Fund’s economically stronger member countries to help replenish the CCRT, which had only $200 million available for the world’s poorest countries.
“The UK has responded with a pledge for £150 million ($183 million). Other donors, including Japan and China, are also coming forward with important contributions. “The IMF’s revamped Catastrophe Containment and Relief Trust can now provide rapid debt service relief on IMF debt obligations to more of our poorest and most vulnerable members. This will help them to channel more of their scarce financial resources to their vital emergency medical and other relief efforts. Furthermore, we are calling on donor countries to replenish the Trust’s resources to help boost our ability to provide additional debt service relief to our poorest member countries,” Georgieva said.
The CCRT allows the IMF to support international debt relief efforts when poor countries are hit by severe natural disasters or battling public health crises—such as the current coronavirus pandemic—with grants for debt service relief.
