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These are not interesting times for Nigerian investors as the impact of falling oil prices continues to mount downward pressure on the economy. We have discussed extensively on how the fall in global crude oil prices has exerted a strain on the Nigerian economy. The strain is evident in the proposed austerity measures, a proposed cut in government spending, and the freefall of the Naira against the Dollar and more recently, the official devaluation of the Naira.
However, it appears that we are yet to see the worst-case scenario for the Nigerian economy amid falling oil prices. The latest addition to the burden being borne by the Nigerian economy is the assessment of Nigeria's economic outlook by the Standard & Poor, a global ratings agency.
In April 2014, the Standard & Poor gave Nigeria a sovereign rating of BB- with a negative outlook to suggest that the country has less than impressive credit rating and that the situation does not show signs of improving in the short term. However, the S&P in a recent assessment has released its new position on the Nigerian economy. In the new rating, Nigeria was given a sovereign rating of BB- with a negative watch rating.
It might interest you to know that a BB- rating presupposes that the country's economic outlook is less vulnerable in the near-term but that it faces major ongoing uncertainties to adverse business, financial and economic conditions. In fact, the BB- rating is the 8th rating on a list of 12 possible ratings from AAA to D.
The Standard & Poor's low rating of the Nigerian economic outlook is hinged on the downward pressure caused by falling oil prices and the increased sense of political uncertainty occasioned by the postponement of the February elections. Hence, the BB- rating, while not an outright downgrade, is not a good indicator for where the Nigerian economy is headed.
The Minister of Finance, Dr. Ngozi Okonjo-Iweala was quick to note that other oil-producing countries such as Saudi Arabia have also been lowered to a negative watch and that we can obtain solace in the fact that some other oil-producing countries such as Bahrain and Oman have been downgraded.
What A lowered Economic Rating Really Means for Nigerian Investors?
The S&P economic ratings are not designed to tell investors where and how to invest and it is not expected that investors use the credit ratings to make investment decisions. However, credit ratings provide valuable insight on credit quality of an investment in a country. Hence, the credit rating provides an indication of how much of their initial investments they can look forward to getting back in the worst-case scenario of an economic default.
Thus, the lowered BB- rating of the Nigerian economic outlook invariably adds more fuel to the already volatile economic situation of the country. Based on this lowered rating, we can expect more outflow of funds from the Nigerian capital market; thereby leading to further decline in the value of Nigeria stocks.
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