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S&P Global Ratings has downgraded Nigeria’s sovereign credit ratings to B from B+ with a stable outlook, according to a statement released on Friday. The ratings agency said the downgrade to five levels below investment grade is due to the deterioration of Nigeria’s economic fundamentals since the last ratings review in March this year.

“Nigeria's economy has weakened more than we expected owing to a marked contraction in oil production, a restrictive foreign exchange regime, and delayed fiscal stimulus,” the ratings agency said. “Since our last review in March 2016, when we expected Nigeria's economy would grow by at least 3 percent in 2016-2019, the economy has weakened significantly. Both the oil and non-oil sectors contracted markedly in the first two quarters of 2016.”

Nigeria’s economy slipped into a recession earlier this year after recording two consecutive quarters of negative growths rates of 0.36 per cent in Q1 2016 and 2.1 per cent in Q2 2016. The country’s inflation rate has also risen from 9.6 per cent in January this year to 17.6 per cent in August.

S&P said it expects a 1 per cent contraction in Nigeria's real GDP growth in 2016, a 2 per cent growth rate in 2017, and a return to higher growth of 4 per cent from 2018.

“We believe that since passing the fiscal budget, government spending together with liberalization of the interbank foreign exchange market, may boost the economy and spur positive GDP growth next year,” the ratings agency said.

Given the recent devaluation of the naira, S&P said it expects Nigeria’s GDP per capita to be $2,000 in 2016, down from $2,548 last year.

“We think that medium-term prospects could brighten with a rebound in the oil price, as well as government reforms across the economy, including the establishment of a treasury single account (TSA), improvements in the power sector, reforms to the Nigerian National Petroleum Company (NNPC), and reforms to increase non-oil fiscal revenues and reduce fiscal leakages,” the ratings agency said.

With the latest downgrade by S&P, Nigeria’s credit rating has been downgraded by all three major ratings agencies, including Fitch and Moody’s. This could make Nigeria's sovereign bonds less attractive and affect the government’s plans to issue a $1 billion Eurobnd on the international markets this year to fund the 2016 budget.

“We forecast that the general government will meet its 3.6 percent of GDP 2016 gross borrowing requirement through domestic issuance, mostly taken up by the banks, and through external debt. We expect the government will borrow up to 1.5 percent of GDP on a blended basis from the World Bank and African Development Bank, from Chinese bilateral lenders, and from the international capital market.”