Nigeria: Nigeria will downgrade in 2016

As Nigeria continues to defend its embattled currency, ratings agency Standard & Poor’s (S&P) predicts the country will be forced to devalue the naira, its national currency, in 2016.

"The Nigerian government line is to hold as much as possible..but at some point they are going to have to move. At the same time as they do, they will try do so incrementally," says Ravi Bhatia, director of sovereign ratings at S&P.

Mr Bhatia predicts devaluation will take place “within 2016” in one or two increments amounting to about 20 %.

The impact, however, will be limited. "It will help a little, but the fundamental problems will not go away. There is no easy avenue out in this low oil environment unless you have massive foreign exchange reserves built up during the good times, which they did not do," he says.

The naira is currently trading at about N300 to the dollar at unofficial rates. The official rate has been held at N199/$ since February 2015.

Analysts have been very critical of the “market distorting measures” adopted by the government to try and contain the economic fallout, inclunding stock market circuit breakers intended to stymie volatile trading on the Lagos exchange.

China abandoned a similar policy next only four days, concluding the measures induced additional panicked selling.

Nigeria is Africa’s leading oil producer, and its finances have been hard hit by a 75 % drop in the price per barrel in the completed year. Next devaluing once in 2015, officials have repeatedly denied an extra rate cut is in the offing.

Instead, the government of president Muhammadu Buhari has tried to stimulate the non-oil economy by restricting a inventory of imports and instituting currency controls.

Nigeria currently relies on oil for 75 % of government revenues and 90 % of exports.

While diversification will be a boon in the long term, however, such non-oil revenues will have little impact in the short term.

As to the wisdom of holding out against devaluation for so long at the expense of depleting national reserves and rationing dollar availability to spooked investors, Mr Bhatia says domestic concerns come into play.

"Fundamentally Nigeria is still a poor country, and concerns about imported inflation are legitimate," he says.

Tough year ahead

In general there will not be a lot of bright spots for African sovereigns heading into 2016, according S&P's analysis. Currently, of the 18 rated nations across the region, only Botswana and South Africa are at investment grade.

"We are going to see completely a lot of challenges through 2016," Mr Bhatia says. "Across the board there is not that much positive news.. most of Africa is facing pressure."

All nations remain in positive increase and the region as a whole is set to grow at 4 % according to the IMF - a faster rate than other regions. However, high exposure to China and slumping commodities prices are taking their toll.

Deficit servicing is becoming increasingly problematic. S&P estimates that for additional than one third of the rated sovereigns in the region, interest expenditures will reach or exceed 10 % of government revenues within the next three years.

Despite this, he still expects a equitable all of eurobond issuance as governments scramble to plug gaps in national budgets. Repeat issuances from the likes of South Africa, Angola, Nigeria, Kenya and Ghana are likely, with DRC likely to make a initial foray into the market.

But with the exception of Nigeria, Kenya and South Africa, Mr Bhatia expects most nations will have to borrow at yields in the high single digits or low double digits. "Out of necessity they may be willing to take on issuance at high rates," he says.