Fuel subsidy suspension policy increases Nigeria’s credit risk

The Federal Government’s decision to extend the implementation of the fuel subsidy removal policy has affected the cost of securing Nigeria’s dollar bonds as Nigeria’s credit default swaps hit their highest level since October 2020.

This was revealed in a report by Bloomberg on Wednesday evening, as Nigeria’s five-year credit default swaps recently rose by 100 basis points.

This comes as the fuel subsidy delay would see the already cash-strapped nation spend nearly N3 trillion on subsidies, as the NNPC meets the cost of the subsidy through a sub-fund. recovery and other means.

What they say about rising credit risk

The report warned that the cost of insuring the country’s dollar bonds against default had risen to its highest level since October 2020, rising from 450 basis points to 550 in the credit risk analysis for five-year credit default swaps.

Samir Gadio, head of Africa strategy at Standard Chartered, said while credit default swaps have risen in emerging markets recently, Nigeria has risen more than its peers. “despite robust oil prices and moderate external debt service relative to foreign exchange reserves.”

Gadio also warned that the suspension of oil reforms would further worsen Nigeria’s budget deficit if, as the government has signaled, this year’s spending plan is changed to include fuel subsidies beyond the current limit of June.

Nigeria’s low oil production and capacity also add to concerns, as the report says Nigeria pumped 500,000 barrels per day below capacity in November 2021, with oil revenues accounting for just over half of government’s target in the first 11 months of 2021, with revenue of just N970 billion.

Gadio also warned that if oil prices continue to rise, Nigeria’s spending on the subsidy will also increase.

However, Nairametrics reported earlier this month that Finance Minister Zainab Ahmed had assured that the level of debt was still within sustainable limits and that his medium-term objective was to raise the revenue-to-income ratio. GDP from 8-9% currently at 15%. by 2025.

For debt service, Ahmed disclosed that at the rate of N3.61 trillion, this would represent 21% of total expenditure and 34% of total revenue, citing that the provision to repay maturing bonds to contractors/ local suppliers of N270.71 billion represents 1.6% of total expenditure.

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