Moody’s Faults CBN’s Sale of OMO Bills to FPIs to Boost Reserves
By Dipo Olowookere
Renowned rating agency, Moody’s Investors Service, has knocked Nigeria for using funds foreign investors to boost its external reserves, saying this practice spells danger for the country’s economy.
In a report released on Wednesday, the agency said because of situations in the nation’s economy as well as government policies, it was revising Nigeria’s outlook to negative from stable.
“The negative outlook reflects Moody’s view of increasing risks to the government’s fiscal strength and external position. Already weak government finances will likely weaken further given an extremely narrow revenue base and persistently sluggish growth that hinders fiscal consolidation.
“As pressures mount, there is a risk that the government resorts to increasingly opaque and costly options to finance a moderate but rising debt burden. Moreover, vulnerability to an adverse change in capital flows is building in light of Nigeria’s increasing reliance on foreign investors to fund the country’s foreign exchange reserves,” the ratings report said.
Nigeria’s foreign exchange reserves recently dropped below $40 billion and this is giving policy makers something to worry about. To shore up the reserves, the Central Bank of Nigeria (CBN) stopped local investors from buying its OMO bills, allowing only foreign portfolio investors
As noted by Moody’s Nigeria’s external position is increasingly dependent on foreign capital inflows in the form of portfolio investments, which by definition are volatile and susceptible to reversal.
“In order to maintain price and exchange rate stability, the CBN has issued domestic certificates (via Open Market Operations) to mop up Naira liquidity, which has been boosted following the creation of the import-export windows by the central bank in 2017.
“The stock of certificates has grown very quickly to reach N17.4 trillion in September 2019 from N5 trillion in 2017, of which around N5.8 trillion ($16 billion) are currently held by foreign investors,” the report said.
It added that, “In order to attract foreign investors, the CBN is paying high interest rates on these certificates. This policy is very costly, and with consequent impact on the yields of other government financing instruments.
“Importantly, the large holdings of foreign investors make Nigeria’s external position vulnerable to an adverse change in investor sentiment that could quickly materialize given the short-term nature of the instruments,” it said.
Also, in the report, Moody’s affirmed the B2 long-term local and foreign currency issuer ratings, the B2 foreign currency senior unsecured ratings, and the (P)B2 foreign currency senior unsecured MTN programme rating.
It explained that the decision to affirm the rating at B2 recognizes a combination of credit strengths including the country’s large and diversified economy supported by vast oil and gas endowments, notwithstanding persistent credit weaknesses such as its very weak institutions and governance framework and in particular poor public finance management.
“Concurrently, Moody’s has maintained Nigeria’s country risk ceilings at their current levels: Foreign Currency bond ceiling at B1, Foreign Currency deposit ceiling at B3, and Local Currency bond and deposit ceilings at Ba1,” the report stated.