Moody's Investors Service ("Moody's") has today downgraded the long-term foreign and local currency issuer ratings of the Government of Niger to Caa3 from Caa2. The outlook has been changed to stable from negative.
The downgrade reflects the continued accumulation of payment arrears on debt service because of the sanctions from the Economic Community of West African States (ECOWAS) and West African Economic and Monetary Union (WAEMU) that prevent cross-border payments, which points to higher losses for private sector creditors than Moody's assumed previously. Moreover, the sanctions in place since the end of July 2023 in response to the military coup have exacerbated economic headwinds, further hindering the government's eventual capacity to meet its debt commitments. The military-led Government of Niger has indicated its intention to withdraw from ECOWAS, injecting further uncertainty regarding when sanctions may be lifted. Relatedly, financing risks are increasing. The government remains reliant on the domestic banking system as its main source of funding while sanctions remain in place. Although the regional central bank has announced temporary forbearance measures to prevent an immediate crystallization of losses on banks' balance sheets, an eventual declaration of bond impairment would curtail domestic banks' ability to refinance Nigerien bonds with the regional central bank, thereby limiting banks' ability to meet the government's financing needs.
The stable outlook balances up- and downside risks. Downside risks relate to the risk of further substantive payment arrears accumulation on Niger's debt instruments that is no longer consistent with a Caa3 rating even after sanctions are lifted. In addition, a further deepening political and economic rift between the Government of Niger and other West African economies that escalates into tension within the WAEMU and Niger's potential exit from the monetary union (while still unlikely in Moody's view) would have far greater consequences for investment and development prospects than withdrawal from ECOWAS. Upside risks relate to the commissioning of the oil pipeline to Benin last November 2023 and the likely boost in foreign exchange revenue over the course of 2024 that supports a rapid clearance of payment arrears in local- and foreign currency if/when sanctions are ultimately lifted.
Concurrently, Moody's has lowered the local currency (LC) ceiling to B3 from B2, maintaining the three-notch difference from the sovereign rating, and lowered the foreign currency (FC) ceiling to Caa2 from Caa1, maintaining the two notch gap below the local-currency ceiling. The three-notch gap between the LC ceiling and the sovereign rating reflects Moody's assessment of the relatively large footprint of the government in the economy, a weak business environment, deteriorating governance and institutional capacity in the wake of the military coup and very high exposure to political risks, mitigated by Niger's WAEMU membership that lowers balance of payment risks and supports macroeconomic policy reliability. The foreign currency ceiling at Caa2 reflects the impact of sanctions that affect most cross-border transfer payments via the regional banking system, increasing transfer and convertibility risks, notwithstanding Niger's WAEMU membership that benefits from the French Treasury guarantee of the peg between the CFA franc and the euro, which Moody's expects to remain unchanged in the baseline.
