Moody’s upgrades Nigeria’s outlook to “positive” on stronger external buffers

Global credit ratings agency Moody’s has revised its outlook for Nigeria upwards to “positive” from stable in response to the country’s improved external position, especially its foreign exchange reserves.

The reserves have recorded robust growth lately from buffers that are making the economy increasingly able to handle shocks, Moody’s noted.

In a rating action published on Friday, the agency also alluded to Nigeria’s vibrant economic growth, backed by relative stability across macroeconomic indicators, among its key considerations for the upgrade.

Optimism is building around Nigeria’s external position, with current account surplus much stronger and FX reserves, which sharply fell to $32.1 billion in April 2014 in the heat of President Bola Tinubu’s sweeping currency reforms, now at $53.3 billion. That is the peak in at least twenty years.

Increased oil production levels are matching higher oil prices to yield mega gains for Africa’s largest crude producer in the face of a yawning supply gap that has opened up across the world, following the US-Israel war against Iran.

Brent, the benchmark for Nigerian crude in the international oil market, traded at $71.3 per barrel on 27 February, a day before hostilities broke out, compared to $88.3 on Friday.

Export proceeds from oil output have boosted accretion to the reserves, following a newfound drive that delivered an average of 1.7 million barrels per day (including condensates) in the last four months.

The government wants the promising results and the progress recorded in beefing up security in violence-prone production areas to serve as the playbook for its ambitious goal of increasing volume to 3 million bpd by 2030.

Moody’s, however, affirmed Nigeria’s country ratings at “B3” in view of constraints in its ability to mobilise revenue and limited debt service potential.

The upgrade in outlook is a further positive for Nigeria after FTSE Russell, which provides benchmark solutions and markets stock market indices globally, confirmed on Thursday the country’s reclassification to a frontier market with effect from next month.

In March, FTSE Russell had assured that Nigeria’s reclassification would come to force in September before a lack of clarity about the country’s transition from a T+2 settlement cycle to a shorter cycle of T+1, aimed at boosting liquidity in the equity market, caused a temporary setback.

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Inadequate communication and ambiguity around that policy shift led investors, traders, and analysts to conclude that the shorter clearing cycle, introduced this June, requires international investors to prefund transactions.

The stringent condition is seen as capable of deterring foreign portfolio investment and making the country less business-friendly.

That led FTSE Russell later in the month to pause the planned upgrade.

Arnold Dublin-Green, MD/CEO of Renaissance Asset Management, told PREMIUM TIMES last month that Nigeria’s reclassification could help draw a potential $800 million in foreign inflows into the equity market in the best-case scenario.

“The idea of the FTSE and frontier index was that the inclusion meant that we are expecting a good amount of foreign portfolio inflows. You know anything between $100 million to $400 million going into the equity market,” he said.

“Outside of that, there are active investors who will want to beat the index, and that inflow could be another $400 million or so,” he added.