Moody’s Investors Service has today affirmed Nigeria’s Ba3 Federal Government issuer rating with a stable outlook.
The affirmation of the Ba3 issuer rating with a stable outlook of the Federal Government of Nigeria (FGN) is based on three key rating factors: The strength of the federal government balance sheet, despite budgetary pressures stemming from the current low oil price environment; Nigeria’s robust medium-term real GDP growth prospects, despite the current economic slowdown; and the successful democratic presidential elections provide an opportunity for the country to improve institutional strength and governance.
In a related move, Moody’s lowered Nigeria’s foreign currency ceiling for bonds to Ba2 from Ba1, which reflects a somewhat higher risk that the government would impose a moratorium on other external borrowers in the event of its own severe financial distress. While overall Nigeria’s external vulnerability remains relatively low, Moody’s notes that the lowering of the foreign currency bond ceiling takes into account the recent restrictions imposed by the monetary authorities to conserve the central bank’s foreign exchange reserves.
Additionally, Nigeria’s local currency bond and bank deposit ceilings remain at Baa3, and the foreign-currency ceiling for bank deposits is unchanged at B1.
RATINGS RATIONALE
FIRST DRIVER — A RELATIVELY STRONG GOVERNMENT BALANCE SHEET
The first rating factor underpinning the affirmation of Nigeria’s Ba3 Federal Government issuer rating relates to the strength of the government balance sheet, both on a standalone basis and relative to peers. General government debt is very low, estimated at 14% of GDP in 2015 against a Ba-rated median of 45% of GDP, and with an external debt component that is only 2.2% of GDP, mostly on concessional terms. Although interest payments have increased to 17.9% of revenues, owing in part to the drop in revenue, government liquidity is ensured by a strong domestic capital market that could absorb even larger deficits.
With the steep drop in oil prices over the past year, the 2015 general government deficit has deteriorated more than budgeted for. Moody’s estimates that the general government deficit will come in at 4.2% of GDP, of which 2.2% is the FGN’s deficit following the approval of the supplementary budget law, with the rest stemming from the accumulation of arrears at the level of the states and municipalities. The government may also use its newly consolidated Single Treasury Account (STA), which holds in excess of NGN 1.6 trillion ($8 billion), to finance part of its deficits.
Despite an even lower budgeted oil price of $38/barrel proposed for 2016, the government plans to undertake revenue enhancement and expenditure cutting measures to narrow the consolidated deficit to between 2% and 3% of GDP in 2016. These include efforts being deployed to increase non-oil revenue (one of the lowest collections in the world relative to GDP), VAT especially. On the spending side, the plans focus mainly on reducing current spending, with the enhanced transparency of the STA deterring corruption and promoting increased efficiency throughout government agencies. Moody’s notes that the budget consolidation faces considerable execution risks but the rating agency expects some progress to be achieved as early as next year.
SECOND DRIVER — ROBUST MEDIUM-TERM GROWTH PROSPECTS
The second factor driving the rating affirmation is Nigeria’s robust medium-term real GDP growth prospects, despite the current economic slowdown. The current oil price shock has been more severe for the economy than in 2009-10 because Nigeria entered the current shock with nearly no fiscal savings. Fiscal and monetary adjustments had to be more severe this time. Fiscal retrenchments, naira depreciation and FX/import rationing, as well as arrears at the state and municipal levels are acting — and will continue to act — as a drag on economic activity at least until mid-2016. Thus, while we expect real GDP growth to drop to 3.5% in 2015, we forecast a rebound to 4.9% in 2016.
Moody’s expects Nigeria’s rapid demographic expansion and the associated growth in such non-oil sectors as construction and services, alongside improving power availability, will continue to support a robust growth rate. Additionally, the resumption of some infrastructure projects (thanks to a more stimulative budget geared towards growing capital spending) will gradually support faster growth. Economic activity is thus likely to accelerate in 2016, benefiting in particular from the base effect of the electoral-related slowdown and the intensification of the fight against Boko Haram in 2015.
Once the economy is fully adjusted to a lower oil price environment, Moody’s says Nigeria will probably return to its long-term potential growth rate of between 5% to 6%. This pace would assist the government’s fiscal consolidation and structural reform efforts.
Moody’s also expects the country’s external position to remain strong over the longer term, with total external debt currently at 3.5% of GDP and FX reserves continuing to provide between 5 to 6 months of import coverage. Nonetheless, the oil price shock has led to some pressure on the country’s external position as illustrated by the current account balance moving into a small deficit position this year and next. In order to conserve its declining FX reserves, this year the Central Bank introduced a series of temporary measures aimed at curbing imports of targeted products and services.
THIRD DRIVER — OUTCOME OF PRESIDENTIAL ELECTIONS COULD LEAD TO A STRENGTHENING OF THE COUNTRY’S INSTITUTIONS AND GOVERNANCE
The third driver behind Moody’s decision to affirm Nigeria’s Ba3 issuer rating is the paradigm shift towards a more transparent and functional democracy that was demonstrated by the orderly presidential transition earlier this year when for the first time, an opposition candidate was elected and the incumbent president conceded defeat without incident. In Moody’s view, the smooth transition has and will continue to have far-reaching consequences throughout Nigerian society, chief among them a reduction in political risk.
Nigeria’s currently very weak score for institutional strength in Moody’s sovereign bond methodology is an important structural constraint on its rating. The rating agency believes the lack of violence and the democratic success surrounding this year’s presidential election opens up the possibility of a gradual improvement of Nigeria’s very weak governance indicators — especially accountability and the rule of law. President Muhammadu Buhari’s long-awaited appointment of a cabinet of ministers marks an important next-step toward consolidating his policy priorities, namely to stamp out corruption, reform the oil sector and eliminate the Boko Haram terrorist group. His new administration already sent several signals that “business as usual” in Nigeria is over.
Moody’s believes the government to be more assertive and to lead the debate concerning the medium-term economic framework, resulting in a more coherent set of policies less influenced by the current external environment. Among the numerous credit challenges on the horizon, the creation of a new structure for the oil industry that will be conducive for investment is key to avoiding a decline in oil production over the medium-term. So is the current restructuring of the Nigerian National Petroleum Corporation (NNPC) as well as finding a lasting solution to the government’s funding issues in the joint ventures. Additionally, the long-term issue of growing income inequality between the north and the south will require long lasting efforts so as to the fight against the insurgency led by Boko Haram in the north-east.
RATING OUTLOOK
The stable outlook balances robust growth prospects and low level of debt against low per-capita incomes, weak institutions, slow progress in executing structural reforms and an acute fiscal vulnerability to adverse oil price shocks.
What Could Change the Rating — Up/Down
Positive pressure on the government rating could build in case of 1) successful reforms in the oil and electricity sectors that spur growth; 2) significant growth of non-oil revenue to strengthen the resilience of public finances; 3) a strong improvement in institutional strength with respect to corruption, government effectiveness, and the rule of law; and 4) increasing the existing financial buffers (ECA and the sovereign wealth fund) to an aggregated level sufficient to provide a buffer against prolonged oil price and production volatility.
Downward pressure on the rating would develop in the event of 1) a prolonged slowdown in economic growth and investment; 2) a prolonged period of fiscal deterioration; or 3) further delays in implementing key structural reforms, especially in the oil sector in order to maintain current levels of production over the medium-term.
GDP per capita (PPP basis, US$): 6,031 (2014 Actual) (also known as Per Capita Income) Real GDP growth (% change): 6.3% (2014 Actual) (also known as GDP Growth) Inflation Rate (CPI, % change Dec/Dec): 7.9% (2014 Actual) Gen. Gov. Financial Balance/GDP: -2.3% (2014 Actual) (also known as Fiscal Balance) Current Account Balance/GDP: 0.2% (2014 Actual) (also known as External Balance) External debt/GDP: 2.8% (2014 Actual) Level of economic development: Low level of economic resilience Default history: No default events (on bonds or loans) have been recorded since 1983.
On 7 December 2015, a rating committee was called to discuss the rating of the Federal Government of Nigeria. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risk has not materially changed.
