Moody’s Investors Service on Monday 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.
Moody said on 29 February 2016, a rating committee was called to discuss the rating of the Nigerian Government.
The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength have decreased.
The issuer’s fiscal or financial strength, including its debt profile has decreased. Other views raised included: The issuer’s institutional strength/ framework has not materially changed.
The issuer’s governance and/or management have not materially changed. Moody’s would downgrade Nigeria’s Ba3 rating if the review were to conclude that the government’s plans are unlikely to be adequate to sustain Nigeria’s economic or government balance sheet strength. A downward rating adjustment for Nigeria would most likely be limited to one notch.
Signs of acute fiscal or balance-of-payments deterioration would also exert downward pressure on the rating.
However, in the case of Nigeria, those risks are rather limited, as the government’s total debt is estimated at 13.6% of GDP in 2015 and compares very favourably with peers.
Similarly, external debt for the country is small and likely to increase, while remaining at around 6% of GDP over the next few years.
Additional signs of external pressure might include a further fall in the price of oil, sustained capital outflows and pressure on the exchange rate and foreign-currency assets.
Deterioration in the domestic or regional political environment, resulting in disruptions to oil production and/or foreign investments in the economy, would also be credit negative.
Nigeria is highly dependent on hydrocarbons to support economic growth and to finance government expenditure. Oil and gas account for over 90%of goods exports and these exports expressed in % of nominal GDP are estimated at roughly 17% of 2016 GDP. It also provides an estimated 40% of consolidated government revenues (but between 60-70% be- fore the oil price shock).
Between September 2014 and September 2015, the oil price roughly halved.
Since then, it has fallen a further 40%. Moody’s recently revised its oil price assumptions for Brent to US$33 per barrel in 2016 and US$38 per barrel in 2017, rising thereafter to US$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 4.3percentage points and the fiscal deficit increased from 2.3% in 2013 to an estimated 4.2% in 2015 (which includes estimates of 2% of GDP of accumulated ar- rears at state and municipal levels).
During the same period, the coun- try’s current account balance rela- tive to GDP moved from a surplus of 3.7% to a deficit of 2.8%. Assuming no policy response and other factors being equal, the depressed oil prices for the coming years would imply larger fiscal deficits, resulting in a rise of 7.5 percentage points in Nigerian government debt between 2013- 18. Total government debt would then reach 18% of GDP by 2018.
The roughly 25% 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% in 2013 to 9.6%in 2015.
In its effort to manage the currency in the context of external pressures, Nigeria has run down its reserves from US$42.8 billion to US$28.4billion, the equivalent of 6.7 months of imports, reducing its external buffers against future shocks.
Nevertheless, 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 atend-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% on average, which -while lower than be- fore 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 devel- oped in light of the persistent pressures on the currency.
Fiscal buffers include foreign currency assets, which are small at around US$3.7billion (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$6 billion (or 1.1% of GDP) in the TSA.
Potential calls on these funds are growing, and include the possible future need to refinance government debt (although government external debt is below 3% of GDP), to support the banking industry, to refinance the debt of State Owned Enterprises (SOEs), and to fund future budget deficits.
It is worth noting that the authorities have started reforming and restructuring some SOEs, such as the Nigerian National Petroleum Corporation (NNPC). Moody’s will aim to conclude its review within two months.
Moody’s would maintain and confirm Nigeria’s current Ba3 rating if the rating review were to conclude that the govern- ment’s plans represent a clear, credible fiscal land economic policy response, which offers the prospect of containing the deterioration in the government balance sheet to contain the impact of the sharp fall in the oil price.
GDP per capita (purchasing power parity (PPP) basis, US$): 6,054(2014 Actual) (also known as Per Capita Income); Real GDP growth (% change): 3.5% (2015 Estimate) (also known as GDP Growth); Inflation Rate (CPI, % change Dec/Dec): 9.6% (2015 Estimate); General Government Financial Balance/GDP: -4.2%(2015 Estimate) (also known as Fiscal Balance); Current Account Balance/ GDP:-2.8% (2015 Estimate) (also known as External Balance); External debt/GDP: 3.4%(2015 Actual); Level of economic development: Low level of economic resilience; and Default history: No default events (on bonds or loans) have been recorded since 1983.
