Fitch Ratings forecasts Nigeria GPD growth of 1.5percent in 2017 and 2.6perent in 2018, following first contraction in 25 years in 2016. Nigeria’s GDP growth continued to contract in first-quarter (Q1) 2017, but by less than in the previous four quarters. The positive forecast comes on the heels of Fitch Rating also affirming Nigeria’s long-term foreign-currency Issuer Default Rating (IDR) at ‘B+’ with a negative outlook. Nigeria’s ratings are constrained by weak governance indicators, as measured by the World Bank, as well as low human development and business environment indicators and per capita income.
Fitch affirmed the country’s long-term local-currency IDR at ‘B+’ with negative outlook; while the nation’s short-term foreign-currency IDR was affirmed at ‘B’.
Her short-term local-currency IDR was affirmed at ‘B’; while the country ceiling was affirmed at ‘B+’; and her issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at ‘B+’.
Nigeria’s ratings are supported by its large and diversified economy, significant oil reserves, its net external creditor position, low external debt service ratio and large domestic debt market.
These are balanced against relatively low per capita GDP, an exceptionally narrow fiscal revenue base and a weak business environment.
The negative outlook affirmed the economy reflects the downside risks from rising government indebtedness and the possibility of a reversal of recent improvements in foreign currency (FX) liquidity and faltering of the still fragile economic recovery.
“The recovery will be driven mainly by increased FX availability to the non-oil economy and fiscal stimulus, as higher oil revenue and various funding initiatives have raised the government’s ability to execute on capital spending plans.
“However, the FX market remains far from fully transparent, domestic liquidity has also become a constraint, and the growth forecast is subject to downside risks. Inflation remains high at 16.1percent in July 2017, but Fitch projects it to decline to 11percent in 2019,” Fitch said.
The main factors that led to the downgrade, according to the rating agency, include failure to realise an improvement in economic growth, for example caused by continued tight FX liquidity; and failure to narrow the fiscal deficit, leading to a marked increase in public debt.
Fitch also likened other factors which include a loss of foreign exchange reserves that increases vulnerability to external shocks; worsening of political and security environment that reduces oil production for a prolonged period.
On the negative outlook, Fitch said it does not currently anticipate developments with a material likelihood of leading to an upgrade.
It however listed factors that could lead to positive rating action, as includeing a revival of economic growth, supported by the sustained implementation of coherent macroeconomic policies; a reduction of the fiscal deficit and the maintenance of a manageable debt burden; increased confidence in the FX market or an increase in foreign exchange reserves to a level that reduces vulnerability to external shocks; and successful implementation of structural reforms, for instance raising non-oil revenues, and significant reforms in the petroleum sector.
Crude oil production rose to 1.8 million barrels per day (mbpd) in July 2017, from 1.5 mbpd in December 2016; the increase was driven by the lifting of force majeure at the Forcados export terminal and the completion of maintenance at both Forcados and the Bonga oil fields. Fitch has revised down its expectation of full-year average production to 1.8 mbpd, which is about equal to 2016 production. Separately, Fitch notes that the imposition of an OPEC quota may cap Nigeria’s crude production at 1.8mbpd, which could limit the oil sector’s upside potential. However, as it excludes condensate production, the quota should not affect Nigeria’s near-term production potential.
In April 2017, the Central Bank of Nigeria (CBN) introduced the Investors & Exporters (I&E) currency window and gradually introduced further measures to improve the liquidity of this instrument.
It also intervenes actively to support the currency, while keeping domestic liquidity conditions tight. In addition, higher oil prices and increased portfolio and FDI inflows have enabled the CBN to increase its provision of FX liquidity to the market.
As a result, the parallel exchange rate began to converge towards the I&E rate, currently at around N360 per US Dollar, and foreign currency liquidity shortages eased. Most activity now occurs on the I&E window, and Fitch believes that the I&E rate should now be considered the relevant exchange rate.
Fitch forecasts the general government fiscal deficit to rise slightly to 4.5percent of GDP in 2017 from 4.4percent in 2016. Tax revenue in the first five months of 2017 underperformed budget expectations, as in 2015-16. The current Medium Term Expenditure Framework envisages a combined NGN3.5 trillion of capital expenditures in 2017 and 2018.
In 2016, with a budget year that ran to May 2017 the government executed approximately N1.2trillion of the N1.6trillion forecast in the 2016 budget.
Improved financing will see a stronger execution of capital expenditure plans in 2017 and subsequent years. As oil production rises and the overall economy recovers, Fitch expects that higher revenues will drive a narrowing of the general government deficit to 3.4percent in 2018.
Nigeria’s general government debt stock is low at 17percent of GDP at end-2016, well below the ‘B’ median of 56percent of GDP, and Fitch expects only a moderate increase to 20percent of GDP at end-2017. However, low revenues present a risk to public debt sustainability. General government debt to revenue, at 297percent at end-2016, is already above the ‘B’ category median of 227percent and Fitch forecasts it to increase to 325percent in 2017. The ratio is even higher at the federal government level.
Nigeria’s current account surplus is expected to widen slightly to 1percent of GDP in 2017, from 0.7percent in 2016.
Fitch expects exports to increase by about 30percent in 2017 and an additional 10percent in 2018, as oil production and prices increase. However, imports, which fell by over 30percent in 2016, will also rise as dollar availability increases and the non-oil economy recovers.
“The international reserves position has increased to $30.8 billion as of end-July 2017 and it will be bolstered by expected external financing flows. Part of the reserves may be encumbered in forward contracts.
“The economic contraction in 2016 and tight FX and naira liquidity weakened asset quality in the Nigerian banking sector. Non-performing loans rose to 12.8percent at end-2016, up from 5.3percent at end-2015. Rising impairment charges from bad loans have in turn led to capital adequacy ratios falling to 14.8percent in 2016, from 16.1percent at end-2015. The new FX window has aided FX liquidity for banks in 2017, but credit to the private sector (adjusted for FX valuation effects) is declining”, the rating agency stated.
Iheanyi Nwachukwu
