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Moody’s turns bullish on Nigeria’s economy – But why?

Nigeria

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TL;DR

  • Moody’s upgraded Nigeria’s credit outlook to positive, reflecting confidence in the country’s fiscal reforms and foreign reserve improvements.
  • Despite the upgrade, the country’s economic growth remains sluggish, particularly in the non-oil sector, and the naira has significantly devalued.
  • Challenges persist with high inflation and a heavy debt service burden, despite reforms aimed at revitalizing the economy and attracting investment.

In a remarkable shift of perspective, Moody’s Investors Service has upgraded Nigeria’s credit outlook from stable to positive. This notable change reflects the burgeoning confidence in fiscal reforms and efforts to bolster its foreign reserves.

The Nigerian government’s proactive measures, including the devaluation of the naira and the significant reduction of the oil subsidy, have caught the attention of this global credit rating giant.

Lucie Villa and Matt Robinson, analysts at Moody’s, highlighted that the positive outlook is a direct result of the Nigerian authorities’ reform endeavors. These efforts are perceived as potential catalysts to reverse the recent deterioration in Nigeria’s fiscal and external positions.

However, despite this positive spin, Nigeria’s rating remains at Caa1, which is seven levels into junk status. Moody’s cautious stance stems from the still weak fiscal and external situations in Nigeria, suggesting that the current reforms might not be sufficient to significantly enhance the country’s credit profile.

A closer look at Nigeria’s economic challenges and reforms

Nigeria’s economic growth, particularly in the non-oil sector, has been less vigorous than expected. The growth rate in this sector has been the slowest since the first quarter of 2021, underscoring the challenges in diversifying the economy away from its heavy reliance on oil.

This sluggish growth is further complicated by the 40% devaluation of the naira against the US dollar since the easing of foreign-exchange controls by President Bola Tinubu in June.

The central bank of Nigeria, led by chief Olayemi Cardoso, has committed to curbing inflation and stabilizing the naira. One of the critical steps in this direction is the clearance of forward foreign-exchange contracts, a move aimed at addressing the backlog of demand for the US currency and supporting the naira’s value.

President Tinubu, since taking office on May 29, has implemented rigorous reforms, including scrapping the costly fuel subsidy. These measures are part of a broader strategy to revitalize Nigeria’s economy, attract investment, and achieve a growth rate of over 6% in the coming years.

Such a growth rate has not been seen since 2014. However, these reforms have also contributed to soaring inflation, which hit an 18-year high in October. Gross domestic product (GDP) grew by 2.54% in the third quarter, a slight increase from the 2.51% growth in the previous quarter.

Challenges and potential

Despite Moody’s optimistic outlook, Nigeria faces daunting challenges. The country is expected to allocate a substantial portion of its budget to debt servicing, which is projected to be six times more than the spending on new schools or hospitals next year. Additionally, more than 40% of Nigeria’s population is living in extreme poverty, a stark reminder of the socioeconomic hurdles the nation faces.

Before Moody’s report, Ibukunoluwa Omoyeni, an economist at Vetiva Research, speculated that while the agency might view the minor recoveries in oil production and foreign-exchange reforms positively, it would likely express concerns over the low levels of net reserves.

While Moody’s upgrade of Nigeria’s credit outlook is a positive development, it comes with an array of challenges and caveats. The Nigerian government’s reforms have set the stage for potential improvement, but the path to sustainable economic growth and stability is fraught with complexities.

Disclaimer: The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decision.

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Jai Hamid

Jai Hamid is a passionate writer with a keen interest in blockchain technology, the global economy, and literature. She dedicates most of her time to exploring the transformative potential of crypto and the dynamics of worldwide economic trends.

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