Moody’s Investors Service has placed Nigeria’s Ba3 government bond and issuer ratings on review for downgrade.
The purpose of the ratings review is for Moody’s to assess the extent of the impact of the further fall in oil prices, which Moody’s expects to remain low for several years, on Nigeria’s economic performance and government balance sheet in the coming years. As part of the review, Moody’s will in particular assess the credibility and sustainability of the government’s plans and their ability to mitigate the impact of the lower oil price on Nigeria’s credit standing. Moody’s will aim to conclude its review within two months.
Nigeria is highly dependent on hydrocarbons to support economic growth and to finance government expenditure. Oil and gas account for over 90 percent of goods exports and these exports are estimated at roughly 17 percent of nominal 2016 GDP. It also provides an estimated 40 percent of consolidated government revenues (but between 60-70 percent before the oil price shock). Between September 2014 and September 2015, the oil price roughly halved. Since then, it has fallen a further 40 percent. Moody’s recently revised its oil price assumptions for Brent to $33 per barrel in 2016 and $38 per barrel in 2017, rising thereafter to $48 by 2019.
The structural shock to the oil market is weakening Nigeria’s government balance sheet and its economy, and therefore also its credit profile. Between 2013 and 2015, revenue as a percentage of GDP declined by 4.3 percentage points and the fiscal deficit increased from 2.3 percent in 2013 to an estimated 4.2 percent in 2015 (which includes estimates of 2 percent of GDP of accumulated arrears at state and municipal levels). During the same period, the country’s current account balance relative to GDP moved from a surplus of 3.7 percent to a deficit of 2.8 percent.
The roughly 25 percent depreciation in the exchange rate against the US dollar since the start of the oil price drop has to some extent contained the impact of the oil price shock on the government’s revenues. However, this has been at the cost of higher inflation, which has risen from 7.9 percent in 2013 to 9.6 percent in 2015. In its effort to manage the currency in the context of external pressures, Nigeria has run down its reserves from $42.8 billion to $28.4 billion, the equivalent of 6.7 months of imports, reducing its external buffers against future shocks. However, import cover has remained stable because of the combined effects of devaluation and imposition of soft capital controls. Similarly, the reduction in fiscal reserves — in particular, the excess crude account and the sovereign wealth fund — from US$11 billion at end-2012 to US$3.7 billion at end-2015 (aggregated) over the same period has contained the rise in debt to a certain extent.
Meanwhile, real growth over the next four years is still expected to be slightly over 4 percent on average, which — while lower than before the current shock — is still robust compared with peers.
However, the Nigerian government is undertaking a range of plans that could mitigate the impact on its credit standing, including tax reform to broaden the non-oil tax base. Contrary to other large oil-exporting sovereigns, non-oil GDP accounts for 90% of Nigeria’s GDP and offers a large diversified economic base for this reform effort to be successful. Another reform to raise revenue is the functioning of the Treasury Single Account (TSA), which should help the government better monitor and execute the spending by all levels of government and agencies, and generate some fiscal savings by the end of the year.
The rating review will allow Moody’s to assess the credibility and sustainability of those plans and the government’s ability to mitigate the negative impact of the lower oil price on its credit standing. Specifically, Moody’s will assess the clarity, scope and ambition of the government’s plans relative to the scale of the task, the time required for them to bear fruit, and the reliance that can therefore be placed on them to sustain Nigeria’s credit strength.
Moody’s will also assess how much positive weight should be placed on the country’s buffers, including the Sovereign Wealth Fund, given how they have developed in light of the persistent pressures on the currency. Fiscal buffers include foreign currency assets, which are small at around US$3.7 billion (or roughly 0.8% of forecast 2016 GDP) at the end of September 2015, and domestic local currency assets, which are estimated at roughly US$6 billion (or 1.1% of GDP) in the TSA. Potential calls on these funds are growing, and include the possible future need to refinance government debt (although government external debt is below 3% of GDP), to support the banking industry, to refinance the debt of State Owned Enterprises (SOEs), and to fund future budget deficits. It is worth noting that the authorities have started reforming and restructuring some SOEs, such as the Nigerian National Petroleum Corporation (NNPC).
Moody’s will aim to conclude its review within two months.
