A contraction in government revenues stemming from lower global oil prices combined with weak governance have contributed to the nation’s credit rating cut, Moody’s have said.
Explaining the contraction from B2 to B3, the agency said steep falls in oil production and expensive fuel subsidies have almost “entirely eroded” higher revenues of fossil fuel exports.
The agency said the constraints on oil production are structural due to “repeated theft” and a lack of investment on what is a key contributor to government revenues.
It said options available to manage weaker oil revenue and rising borrowing costs amid global interest rates rises are limited.
As a result, the country is at a greater risk of defaulting on its debt obligations, Moody’s said.
“The scope for the government to deliver on fiscal consolidation is constrained. Moody’s expects government debt affordability to weaken further in the years to come from already very weak levels.
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“Ultimately, as the government dedicates a growing share of its revenue to paying interest, the policy dilemma between servicing creditors and meeting the population’s demand for social and economic development will intensify,” the agency said.
Moody’s said while the finance minister recognises that current oil subsidies are expensive, ending the tax relief next year could prove politically difficult.
It added that while non-oil revenues have progressed in line with budget targets, they are unable to compensate for lower oil revenue and higher interest payments.
Since the beginning of this year, foreign exchange reserves have fallen by around $3billion, to $40billion, the small reduction is mainly due to restrictions imposed by the Central Bank of Nigeria (CBN), Moody’s said.
In July, the finance ministry reported that debt servicing costs exceeded government revenues in the early months of this year, due to faltering oil income.
Between January and April, the government spent N1.9trillion naira (£3.9billion) on debt servicing, compared to revenues of N1.6trillion naira (£3.3billion).