In February 2023, one of the major credit rating agencies downgraded Nigeria’s rating outlook from stable to negative. This reflects the increasing risks to the country’s ability to service its debt over the next one to two years due to intensifying fiscal and external pressures. These risks are linked to low oil production volumes, large refined-petroleum subsidy costs, high debt service expenditure, and a relatively large planned fiscal deficit in the 2023 budget.

This downgrade is a cause for concern as it comes on the heels of a sharp fall in Nigeria’s sovereign dollar-denominated bond after a previous downgrade in January of this year. The economy is estimated to have expanded by about 2.8% in 2022, with a real GDP forecast to average 3.1% in 2023-2026. However, below-capacity oil production will likely continue to affect export growth, while inflationary pressure, fiscal constraints, and sluggish investment will weigh on consumption and investment growth.

Limited and expensive access to international capital markets and a consequent increasing reliance on significant domestic funding at relatively high interest rates are further weighing on net interest costs and the government’s fiscal position. While a potentially more business-friendly administration after the elections could partially counterbalance these factors, the new government will inherit a deteriorating fiscal situation.

The downside risk for Nigeria’s rating also means that her capacity to repay commercial obligations could continue to worsen due to declining external liquidity or a reduction in fiscal flexibility. On the other hand, Nigeria could move from a negative outlook to a stable one if it upscales to a significantly stronger economic performance, decreases its fiscal deficit, and is able to contain financing pressures both externally and internally.