Photograph — Brookings Institute

Nigeria’s outlook for 2020 was last week revised from stable to negative by Standard & Poor’s (S&P) Global Ratings, an international credit rating agency, which cited, among other reasons, the country’s declining foreign exchange reserves.

Forex reserve levels in Africa’s biggest economy have fallen from $45 billion at mid-year 2019 to $38 billion at end-2019 and $36.5 billion in February 2020. Also, Nigeria’s economic growth remains weak and slower than its peers, S&P said in a research update published February 28.

The downgrade could dampen investors’ appetite towards Nigeria’s Eurobond issuance and increase borrowing costs, analysts have said, especially considering the two other prominent rating agencies – Moody’s and Fitch Ratings – also recently changed their outlooks for Nigeria to negative.

Fitch’s credit rating for Nigeria was last set at B+ with a negative outlook due to disruptive macroeconomic policies under the current administration, it said in December. While Moody’s rating was last reported at B2 with a negative outlook, as seen on Trading Economics.

Generally, a credit rating is used by sovereign wealth funds, pension funds, and other investors to gauge the creditworthiness of countries. Rating agencies such as S&P provide global investors with information on the ability of corporations and countries to pay back debt, how likely they are to make interest payments on time or to default.

Thus, being downgraded can have a big impact on Nigeria’s ability to borrow money on the financial markets (and on the costs) as investors would see it as a riskier bet, therefore demanding higher returns to lend to the government.

The downgrade could also worsen the situation for the Nigerian stock market, experts say. This is because the market relies heavily on foreign investment inflows to boost demand and prices of stocks, Nairametrics notes, but foreign investors have largely avoided the country’s stocks due to inconsistency in policies by the central bank.

Countries that have been downgraded in recent years include South Africa, Brazil, the United States, the United Kingdom and a number of European nations.

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