Declining crude oil production and continued energy subsidies "have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices," the rating agency justifies.

Moody's announced, Friday, it downgraded Nigeria's "local currency and foreign currency long-term issuer ratings as well as its foreign currency senior unsecured debt ratings to B3 from B2."  The rating downgrade was due to the deterioration of the country's public finances and its weakening external position, the rating agency explains.

"The rating downgrade is driven by the significant deterioration in Nigeria's government finances as well as its external position, exerting increasing pressure on the sovereign credit profile despite a strong increase in international crude oil prices in 2022. Moody’s assesses that these developments are partly the result of weak governance and are likely to last. The steep fall in oil production in 2022 and the extension of the expensive oil subsidy have almost entirely eroded the boost to government revenue and exports that would otherwise have been anticipated from higher oil prices," Moody's writes. 

It adds that "Nigeria's fiscal and external position hasn't benefited from higher oil prices in 2022, which have been 42% higher on average than in 2021. This is due to the 32% drop in oil production since the beginning of the year (recorded between January and September of 2022) and growing domestic consumption of petroleum products."

Moody's, which placed Nigeria's rating on review for further downgrade, also said the levers available to manage weakening revenues and rising borrowing costs are limited given current global monetary policies.   

"The initiation of the review for downgrade is prompted by the risk that the ongoing fiscal and external deterioration accelerates, weakening further the government's capacity to service debt and thereby increasing further its risk of default," it explains.

The agency also indicates that the unpredictability of government actions, political risk, and the country's dependence on a single source of revenue are significant concerns.