CBx International

Nigeria’s Economy Inches Closer To Junk Territory

Jan 2

By CultureBanx Team

  • Moody’s downgrades Nigeria to a negative B2 rating
  • Nigerian carry trades have returned investors almost 30% so far in 2019

The oil and gas rich country of Nigeria has yet again been downgraded by credit rating agency Moody’s. Now they’ve moved five steps into junk territory with a negative B2 rating which will make it difficult for the investment hungry country to attract more direct foreign capital. Can Nigeria overcome one of its main problems, which is the constant issuance of short-term bonds to protect its beloved naira currency?

Why This Matters: Bond investors have been really into the Nigerian carry trade because of its high yields of about 13%, but Moody’s notes this hurts the country’s economy. Unfortunately,  Nigeria’s central bank’s stock of so-called open-market operation bills has risen to 17.4 trillion naira ($48 billion) from 5 trillion naira in 2017, according to the credit rating agency. Not to mention that a third of this debt is held by foreign entities, that has returned investors around 30% in 2019.

Bond investors have been really into the Nigerian carry trade because of its high yields of about 13%, but Moody’s notes this hurts the country’s economy

Nigeria’s economic growth is expected to be slow and only expand from an estimated 2.3% in 2019 to 2.8% in 2020. The increased short-term bonds to keep the naira currency above board has been effective, but its barely budged against the dollar in 2019. So it’s worked to some extent, because the naira is stable and has been Africa’s second best performing currency after the Egyptian pound.

Situational Awareness: There are some banks on the street who disagree with Moody’s stance like Societe Generale that doubts the carry trade will lose any steam with investors. The French bank predicts the naira currency will only slip only around 1% in 2020.

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