Nigerian Economy Scores ‘Highs‘ and ‘Lows’ in Fresh Rating
Nigeria’s economy has started the processing of healing and a number of international ratings agencies have also registered improved, upgraded macroeconomics estimates for the country after 2020 covid-19 induced pressures on performance.
Though fiscal slippage and lack of policies coordination between fiscal and monetary policies authorities remain a deep blue ocean to be crossed, however, increased oil price and volume appear to have shined a light on government revenue.
In the third quarter, Nigeria’s economic balance sheet expanded 4.03% after 5.01% gross domestic product expansion in the second quarter from a tepid outturn at the beginning of the year.
The headline inflation rate has moderated for the seventh consecutive month, flattered by base effect but high unemployment remains a clog in the wheel.
In a recent rating note, Moody’s Investors Service changed the outlook on the Government of Nigeria from negative to stable and affirmed its long-term issuer and senior unsecured ratings at B2.
The global rating agency anchored its decisions on better oil prices in the market, Petroleum Industry Act and other policy measures, according to the rating note.
Also, Moody’s affirmed the Government of Nigeria’s (P) B2 senior unsecured medium-term note program rating. It said the change of outlook to stable reflects an expectation that higher oil prices and some measures taken by the government which Moody’s thinks will help stabilize the sovereign’s credit metrics and support its external position.
According to the rating note, the ongoing improvements in the macroeconomic and the external position are likely to continue in the next few years, supported by the oil price environment, Nigeria’s new Petroleum Industry Act legislation and the opening of the Dangote refinery that will structurally reduce demand for US dollars.
At the same time, Moody’s expects Nigeria’s fiscal deficit to narrow very slowly, with ongoing efforts to increase non-oil government revenue, although weak governance and institutional capacity are likely to hamper execution, the rating note stated.
Moody’s noted that general government debt -including central bank funding and promissory notes- is projected to rise gradually, towards 35% of GDP by 2025, stabilizing above 400% of revenue.
However, the affirmation of the ratings reflects Nigeria’s significant credit constraints, balanced by some credit strengths supporting the B2 ratings.
“The credit constraints include fiscal and external reliance on the hydrocarbon sector as well as its very weak institutional framework and governance, reflected in extremely low revenue generation. Susceptibility to event risk remains mainly driven by political risk”.
Over the medium to long term, Moody’s said in the rating note that environmental and social risks represent significant rating constraints for Nigeria.
It noted that weak institutions indicate a low capacity to adjust to rising social demands from a fast-growing population earning very low incomes and/or to the transformation of the government’s revenue and foreign-currency generation capacity implied by carbon transition.
In particular, compared to historical experience, Moody’s expects oil exports to produce less robust revenues at peak oil prices and weaker revenues at trough oil prices because global initiatives to limit the adverse impacts of climate change will increasingly constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources.
Balancing these factors, the global rating firm registered that the scale of the economy is relatively diverse, with services accounting for approximately 50% of the economy, supporting the rating.
Moreover, it maintained that liquidity risk appears manageable with borrowing requirements around 8% of GDP -although relatively much higher as a proportion of revenue- over the next few years.
Nigeria’s local currency (and foreign currency country ceilings remain unchanged, the rating note stated. It added that the local currency ceiling at Ba3, two notches above the sovereign issuer rating, incorporates some degree of unpredictability of government actions, political risk and the reliance on a single revenue source for the government.
Also, the foreign currency country ceiling at B2, two notches below the local currency ceiling, reflects transfer and convertibility risks, given the track record of imposition of capital controls during oil price shocks.
Considering the policy development and macroeconomic conditions, Moody’s expects Nigeria’s economy to grow by 2.8% in 2021 and by 3.5% per year on average until 2025.
It said this economic recovery is mainly due to low base effects, but also to improved dollar liquidity which has been facilitated by higher oil prices and the support of International Financial Institutions (IFIs) such as the IMF.
“While growth prospects are better than pre-pandemic levels, they remain weaker than before the 2016 oil price shock and insufficient to significantly lift living standards given population growth”.
Moody’s expects that oil production -including condensate- will slightly increase in 2022 to reach 1.8 million barrels per day (mbpd) against an estimated 1.7 mbpd in 2021.
Further out, the recent adoption of the Petroleum Industry Act (PIA) has reduced uncertainties that, over more than a decade, significantly weighed on investment in the Nigerian oil and gas sector, it added.
Over the next few years, the rating agency believes that other sectors including agriculture and services are also likely to perform well because of ongoing government support and improved dollar liquidity respectively.
However, it noted Nigeria’s weak but stable fiscal strength, saying public finances have been deteriorating since 2016 due to successive oil prices shocks.
It added that the government’s inability to significantly expand the non-oil revenue base means that its balance sheet is exposed to further shocks.
“In the next few years, deficits will narrow with the recovery in oil prices, production and some fiscal measures, albeit remaining substantial to average 4.5% of GDP over 2021-2025.
“Debt affordability will remain very weak and debt levels will increase slightly towards 35% of GDP and stabilize above 400% of revenue”, Moody’s projected.
Also, it expects general government revenue to be around 6.8% of GDP in 2021, slightly higher than in 2020 at 6.3%; and to gradually increase to reach 8% in 2024-25.
The rating note stated that the government’s goal for revenues to reach 15% of GDP by 2025 is unlikely to be achieved or even approached, given the institutional capacity constraints and lack of track record in improving public finance.
“While the IMF has identified several fiscal measures to raise revenue, based on Nigeria’s track record, Moody’s expects only a few of the reforms to be fully implemented over the period.
“The phasing out of oil subsidies, currently planned by the authorities in 2022, would potentially raise revenue by 1% of GDP if fully implemented; Moody’s assumes that only some of these financial benefits will be realised in the foreseeable future”.
In the context of very gradual fiscal consolidation, Moody’s expects liquidity risk to remain contained with gross borrowing requirements of around 8% of GDP in the future after they peaked at 9% of GDP in 2020.
It said, “Although the government has relied on the central bank funding to finance its deficits since 2018, it has also been able to increasingly rely on its domestic capital markets, which have continued to develop rapidly”.
Meanwhile, external government liquidity risk remains limited, Moody’s added. It however noted that external debt service remains manageable, with an average maturity at around 14 years.
The ratings hinted that slightly more than half of government external debt is on concessional terms, with 55% owed to multilateral development banks.
Overall, Nigeria’s average external debt service – principal and interest – is relatively small at around $3.2 billion (0.7% of GDP) per year over the next five years, Moody’s said.
The government is likely to continue to favour official sector external borrowing and opportunistic long-term issuance on the international markets, according to the rating note.
Surprisingly, the rating expects Nigeria’s external position to strengthen in the coming years, saying an increase in oil production and the commissioning of the Dangote refinery in 2022, with full production expected in 2023, will raise exports and lower imports, and strengthen Nigeria’s external position in the next few years.
The rating note reads that Moody’s expects the current account deficit to be around 1.1% of GDP for 2021 compared to 3.9% in 2020 and it is likely to turn into surplus from 2022 onwards averaging 1% of GDP over 2022-25 period.
Oil-related products such as fertilizers and petrochemicals currently make up 35%-40% of the import bill. As the refinery ramps up, local production will substitute imports.
Official foreign reserves stood at $42 billion at the end of October 2021, back to pre-pandemic levels after reaching a low of $33 billion in April 2021.
A range of factors have supported reserves, the ratings said. It noted the IMF disbursed $3.4 billion in April 2020 and another $3.35 billion in the form of SDR allocation in August 2021. Nigeria also issued $4 billion of Eurobonds in September 2021.
Nigeria devalued the naira twice in 2020 and 2021, by 23% in March 2020 to N379 from N306 to the dollar and further 8% in June 2021 to N411 from N379 to the dollar.
Given the anticipated small increase in oil production, sustained oil prices and lower imports, combined with continued debt issuance on international markets and official support, Moody’s expects foreign exchange reserves to continue to increase to $45 billion and $48 billion in 2022 and 2023 respectively.
It said this will help reduce the pressure on the naira and improve dollar liquidity in the economy. The global rating agency explained further the affirmation of the B2 ratings reflects Nigeria’s significant credit constraints, balanced by some credit strengths.
On the negative side, it said Nigeria’s credit profile is vulnerable to oil price volatility which is a structural credit constraint given the country’s significant fiscal and external reliance on the hydrocarbon sector.
Another key credit constraint arises from the sovereign’s very weak institutional framework and governance, reflected in particular in extremely low revenue generation, the rating note shows.
It also added that susceptibility to event risk remains mainly driven by political risk.
“Over the medium to long term, environmental and social risks represent significant rating constraints for Nigeria.
“Weak institutions indicate a low capacity to adjust to rising social demands from a fast-growing population earning very low incomes, and to the transformation of the government’s revenue and foreign-currency generation capacity implied by carbon transition”, it noted.
Balancing these factors, the scale of the economy that is relatively diverse, with services accounting for approximately 50% of the economy, supports the rating.
Moody’s said public sector debt remains moderate as a percentage of GDP compared to peers and Nigeria benefits from increasingly deep capital markets.
Liquidity risk appears manageable with a long average maturity of debt that contributes to moderate borrowing requirements for the government, the rating note stated. #Nigerian Economy Scores ‘Highs’ and ‘Lows’ in Fresh Rating