The Lagos Chamber of Commerce and Industry (LCCI) has expressed concern about the recent downgrades of Nigeria’s Sovereign Risk profile by three leading global default risk rating agencies – Fitch, Moody and S&P (Standard and Poor).
Fitch downgraded Nigeria’s long-term foreign currency debt Issuer Default Rating (IDR) from ‘B’ to ‘B-, a little above a junk status (non-investment grade speculative), following Moody’s lead in downgrading the country’s risk outlook, and S&P’s placement of Nigeria’s Eurobonds on its watchlist.
LCCI called on the Federal Government to swing into action and address identified problems by the rating agencies, instead of pretending that nothing is wrong.
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“The rating agencies all pinned Nigeria’s deteriorating risk profile down to weakening external and government finances, especially the facts that (a.) declining government revenues are now falling short of rising interest payments on government debt, (b.) inadequate availability of foreign exchange, and (c.) heightened exchange rate uncertainty, all in the face of strong global oil prices.
“Rather than continue as if nothing has happened, the Government of Nigeria needs to explicitly address the issues flagged by multiple global risk rating agencies and announce measures to de-escalate the risks arising from them. A commitment by the Government to immediately expedite the attainment of the following positive outcomes will allay the legitimate concerns expressed by the three global rating agencies,” a statement signed by LCCI Director General, Dr Chinyere Almona, said on Sunday.
According to the Debt Management Office (DMO), as at June 30, 2022, the total public debt stock was N42.84 trillion ($103.31 billion). The comparative figures for March 30, 2022, was N41.60 trillion ($100.07 billion).
It also stated that the total public debt to GDP as at June 30, 2022, was 23.06 percent compared to the ratio of 23.27 percent as at March 30, 2022, adding that it remains within the country’s self-imposed limit of 40 percent.
To put the country on the right path, LCCI urged the Federal Government to sustain ongoing conversations and efforts to curb oil theft, remove subsidies, reduce waivers, and unify multiple exchange rates to reduce revenue leakages.
It also called on the Federal Government to “complement ongoing efforts to generate more tax revenue through annual Finance Acts with parallel efforts to generate nontax revenue from fees, rent, and other income from government assets through annual Investment Acts. Countries like UAE and Saudi Arabia rely more on fees than taxes and seem to be better off when compared with countries that rely more on taxes than fees like Nigeria. Nigeria’s issuance of two more 5G technology and telecoms operations licenses by the NCC and the oil licenses granted by NNPC for oil blocks positive steps in this direction that we encourage to replicate across all infrastructure sectors.”
LCCI noted that the country needs to increase the quality of its debt issues to bring down the issue rates on new debt issues, adding that the major problem with Nigeria’s debt is not the size but the cost, citing Malaysia’s debt stock of $225 billion, which is more than twice Nigeria’s debt of $100 billion but has average interest rate less than half of the average of 12 percent that Nigeria spends on lower debt stock.
According to LCCI, Saudi Arabia also owes more than $$260 billion but with average interest rate that is also less than half of Nigeria’s.
“The difference between Nigeria and these countries is that they issue higher quality debt that attracts investment grade ratings from the same global risk rating agencies that are currently downgrading Nigeria’s risk profile towards a junk issuer status. Nigeria does not have any investment grade debt in its portfolio, which are mostly promissory notes or mere IOUs against declining revenues. These are known to attract the highest known issue rates at home and abroad.
“The fact that a Nigerian company recently issued a bond-rated investment grade by Fitch is evidence that the Nigerian government can also make efforts to issue investment grade bonds. Investment grade bonds must however be asset-based rather than revenue-based, as the recent issue cited above shows. Nigeria has far more choice assets it can issue bonds against than the company in question,” LCCI stated.
To provide lasting solution to the inadequate availability of foreign exchange and heightened exchange rate uncertainty, LCCI suggested to the Federal Government to issue more cross-border equity and stop to issue on debt in terms of treasury bills, FGN Bonds, and Eurobonds, but emulate countries like China, India, Brazil, Saudi Arabia, Malaysia, and Egypt in this regard.
Emphasizing equity financing of the 2023 federal budget, it said: “Looking at the Government’s revenue and expenditure framework for 2023, The Chamber is also concerned about the risks of falling into deeper debt crises. The N20.5 trillion budget proposed to the National Assembly by the President for 2023 includes a deficit of a whopping N10.78 trillion, which is more than 50% of the entire budget. The President has proposed that more borrowings will fund N10.5 trillion out of these deficits. It will be insensitive to go ahead with the proposed borrowing after Nigeria’s debt sustainability has been red flagged by multiple global default risk rating agencies.
“In response to the warnings from the global risk rating agencies about Nigeria’s debt sustainability, the National Assembly should revise the financing thrusts of the budget proposals to emphasize equity financing and deemphasize debt financing. Issuing equity at home and abroad (FDI) by inviting foreign investors to invest in state-owned companies, government real estate portfolio, and infrastructure sectors, the way we invited them to invest in LNG, telecoms, and pension sector, would be a better and more sustainable way of funding the deficits.
“With every sense of responsibility and precaution, we urge the Government to be more sensitive to the crisis indicators that are being pointed to by critical stakeholders and announce timely commitments to take required actions.”