By Dipo Olowookere
United States-based rating agency, Fitch Ratings, has expressed worry about the sharp increase in the debt to revenue ratio of Nigeria.
A director at Fitch, Mr Mahmoud Harb, informed Reuters in a chat that this and another factor could force his organisation to further downgrade the rating of Africa’s largest economy.
Mr Harb listed the other factor that could trigger a rating lowering as a rising decline in the foreign exchange inflows into the country, which is mainly derived from crude oil sales.
According to Fitch, Nigeria will need not less than $23 billion to meet its external financing needs in 2020 and the few options the nation has is to run down its foreign reserves.
Business Post reports that as at the close of business on Monday, June 22, 2020, Nigeria had $36.260 billion in its reserves, lower than $36.302 billion on Friday, June 19, 2020.
“We have two elements that could lead us to take a negative rating action/downgrade on Nigeria.
“Aggravation of external liquidity pressures and a sharp rise in government debt to revenues ratio,” Mr Harb informed Reuters.
In April 2020, Fitch downgraded Nigeria to “B” with a negative outlook from “B+”. The reason for this action then was an aggravation of pressure on the country’s external finances.
The local authorities in March reviewed the 2020 budget, bringing down the crude oil benchmark to $30 per barrel because of a sharp decline in the price of the commodity at the global market.
Two months after, the government further reduced the threshold to $25 per barrel after prices fell below $20 per barrel at the international space.
The federal government, which had planned to approach the foreign debt market for a Eurobond of $2.36 billion, shelved the plan and converted it to an N850 billion domestic debt programme.
The funds would be sourced from the sale of debt securities like the FGN Bonds, treasury bills and others, with proceeds to be used for the budget deficit.
Recently, it was reported that in the first quarter of 2020, Nigeria’s debt service to revenue ratio stood at 99 percent, meaning that for every N100 generated by the country, N99 was used to service the various debts incurred by the government.
On Monday, Business Post reported that the Debt Management Office (DMO) assured Nigerians that there will never be a situation where China will have to take possession of the projects financed with its loans because of payment default.
According to the DMO, adequate provisions have been made to repay the debts, noting that, “Nigeria explicitly provides for debt service on its external and domestic debt in its annual budgets.”
“In effect, this means that debt service is recognised and payment is planned for.
“In addition, a number of the projects being (and to be) financed by the loans are either revenue generating or have the potential to generate revenue,” the DMO further said.
The debt office had said in a statement last week that as at March 31, 2020, the total borrowing from China stood at $3.121 billion at an interest rate of 2.50 percent per annum, with a 20-year maturity and a 7-year moratorium.
The agency said the low interest rate reduces the interest cost to the government, while the long tenor enables the repayment of the principal sum of the concessional loans over many years.
“These two benefits make the provisions for debt service in the annual budget lower than they would otherwise have been if the loans were on commercial terms,” the debt office said.
