Some hours ago, Standard & Poor’s, popular called S&P credit rating agency announced that it has downgraded Nigeria’s to junk credit rating status. Many people might not understand what a ‘junk’ credit rating means.
Well, a ‘junk’ rating is one of many credit score that a country, an organisation and an individual can be assigned by a credit rating agency. A Credit rating gives an independent idea of the concerned party’s ‘credit worthiness’ to a lender, an investor, bank or a creditor.
Firstly, let us look at the meaning of credit rating agency.
Credit ratings are usually given by credit rating agencies, we will discuss who are registered and licensed to carryout such functions. There are about three major credit rating agencies in the world. They not only provide ratings to big businesses. Because of their expansive network of researchers, analyst and mathematicians, they are well and able to provide sovereign credit ratings (rating opinions for countries). They include- Moodys’, Standard and Poor’s and Fitch Ratings.
S&P is the agency that has just given Nigeria the junk status. This is the lowest of its ratings. The implication of this is that the possibility of Nigeria defaulting on its debt obligations is higher.
It also means that the country might find it hard meeting up with payment terms. The implication for this that Nigeria’s sovereign bonds will receive less interests from investors. Investors who wants to invest in Nigeria’s debt instruments will demand higher interest rates. This will further put more pressure on Nigerian government to source for funds.
While credit ratings are professionally referred as ‘opinions’ of the credit rating agency and no one is bound to use the information nor make investment decisions based on them.
In the word of S&P: ‘Our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time.
‘Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default’.
‘Credit ratings are not absolute measure of default probability. Since there are future events and developments that cannot be foreseen, the assignment of credit ratings is not an exact science. Credit ratings are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or debt issue will default’.
However, because of their long-term reputation, global network, their influential retinue of clients who use their services, credit rating agencies have become very important in the global financial system.
Therefore Nigeria’s junk status from S&P is abound to affect the government borrowing programmes.
Last week, Nigeria announced that it will be borrowing from Japan, China and World Bank. The tag of junk status from one of the three most respected credit rating agencies in the world can hamper Nigeria’s ‘credit-shopping’. Investors and lenders might demand higher rates and stricter payment plans than earlier planned.