Increased oil prices and production dynamics are expected to sustain economic recovery into 2019 at least, says Moody’s cross-sector Nigeria report released last Tuesday.
Economic recovery should lead to improvements in asset quality and dollar liquidity, both of which deteriorated significantly in 2017. The 2.8 percent growth forecast in 2018 is a testament to this fact.
Spending pressure from widening fiscal deficits may elevate State governments’ debt burden already worth over 150 per cent of their revenue on average and approximately one fifth of the total general government debt.
Although state governments will benefit from increased oil revenue, this revenue will mainly be used to repay existing stocks of arrears. As a result, and coupled with elevated spending pressures from healthcare and education, debt reduction is unlikely.
Outlook for nonfinancial corporates indicates that confidence should foster capital spending which has improved substantially in recent month consequent upon improved access to foreign currencies, even as multiple exchange rates lingers.
As the oil sector continues to support the economy, sovereign’s non-oil revenue generation remains significantly weak. The rise in oil price and production were largely responsible for the economic recovery from recession in 2017.
Federal government payments to former rebels resumed in August 2016, oil production in Nigeria has since recovered to around 2.1 million bpd (including condensates), making it the largest oil producer in Africa.
While other sectors are also contributing to growth, non-oil economy may likely continue to be constrained by the capital controls imposed by the central bank, including the import restrictions on 41 groups of items since June 2015.
Agriculture continues to perform strongly, credit to government’s diversification effort. Manufacturing to accelerate slightly and positive, though slow growth in the services sector is very likely, expected to be around 50 per cent of GDP, given the improvement in dollar liquidity.
According to Moody’s, Oil sector recovery should support public finances, but revenue targets remain elusive. Oil accounts about half of general government revenue and failure to meet targets concerning non-oil revenue will significantly impact on the government’s fiscal performance.
In response to mitigate oil price shock, at 6% of GDP in 2017, (the lowest among all the sovereigns Moody’s rated) the government has prioritized new taxes and improvements in tax compliance.
The government has taken action to reduce its elevated interest costs (2017: 30% of revenue) by replacing costly domestic short-term debt at yields between 15% and 17% with longer-term and cheaper external debt with yields of around 7%-8%.
Shortfall in non-oil revenue is partially compensated by higher than budgeted oil revenue. This, combined with lower inflation and tighter monetary policy that fosters exchange rate stability, will help to create some fiscal space for capital spending.
Higher foreign exchange reserves should be expected mainly due to the rebound in oil production and oil prices, combined with the government’s external borrowings and a resumption of foreign capital inflows.
Foreign exchange reserves have surged since 2017, exceeding $45 billion as of end-March 2018 from $25 billion at the end of 2016. Capital controls that constrain imports have contributed to maintaining reserves at higher levels.
Analysts at Moody’s projects that over the medium term, new production facilities like the fertilizer plant and the new oil refinery should be operational in 2020 and are to help increase local production, reduce the import bill and strengthen Nigeria’s external liquidity position.
