Moody’s Investors Service has predicted that interest payments in 2024 will consume almost 40 percent of revenue in Nigeria, the highest among sovereigns not in default.
It also added that interest rates will stay high in major economies to combat inflation, keeping Gross Domestic Products (GDP) growth below potential.
In its latest report titled, “2024 Outlook – Stable but Difficult as Debt Flattens at Higher Levels, Growth is Muted, “the agency noted that its outlook for sovereign creditworthiness in 2024 is stable, though conditions will remain difficult for governments but will not deviate significantly from 2023.
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“Debt affordability is more prone to deterioration in lower-rated sovereigns, where funding sources remain constrained, or are available only at high borrowing costs.
“A rapid increase in the cost of new borrowing, which precipitated defaults in Ghana (Ca stable) and Sri Lanka (Ca stable), could push sovereigns into default.
“Interest payments in 2024 will consume more than 60 percent and 50 percent of revenue in Pakistan (Caa3 stable) and Egypt, respectively, and almost 40 percent of revenue in Nigeria, the highest among sovereigns not in default.
“Kenya’s high interest burden continues to grow given rising domestic borrowing costs and exchange-rate weakness, offsetting efforts to increase tax revenue,” the report read in part.
According to Moody’s, political and social considerations will influence the pace of fiscal consolidation. Higher food and fuel prices have a disproportionate effect on lower-income households, given the higher share of these items in consumption.
It recalled that governments in Nigeria, Kenya and Angola (B3 positive) eliminated or significantly reduced fuel subsidies in 2023 to reduce fiscal spending.
However, although spending on fuel subsidies will ease as fuel prices decline in 2024, a renewed bout of commodity price gains could spur policy-makers to reintroduce such support.
However, active use of policy will backstop economic activity. Governments face a delicate balance to achieve fiscal consolidation while tamping elevated social risks. Higher rates and weaker debt affordability will limit scope to reduce leverage, although debt burdens the agency predicted.
According to Moody’s, gap in primary balance reflects the difference between forecast for the primary balance in 2024 compared to the primary balance that it would take to stabilise government debt. Moody’s Investors Service also says interest burdens will rise as fiscal deficits and maturing debt are financed at higher interest rates.
“Among higher-rated Emerging Markets (EMs), narrow revenue bases in Malaysia and Indonesia contribute to weak debt affordability, while Mexico’s widening fiscal deficit and large gross borrowing requirements increase its susceptibility to a deterioration in debt affordability.
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