Nigeria’s External Position to Strengthen in Coming Years

Nigeria’s External Position to Strengthen in Coming Years

Nigeria’s external position has been projected to strengthen in the coming year following a sustained rise in global prices of oil. The downside, according to some analysts is the poor investment in oil infrastructure leading to low crude production.

In a report, Moody’s said 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 global rating firm 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, it stated, noting that as the refinery ramps up, local production will substitute imports.

Official foreign reserves peaked at $42 billion at the end of October 2021, back to pre-pandemic levels after reaching a low of $33 billion in April 2021. At the weekend, Nigerian foreign reserve jerked down below $40 billion mark.

That is partly as a result of sustained foreign exchange market intervention to support the local currency, naira, and bulky imports bill trending ahead of exports receipts.

Analysts noted that a range of factors has supported reserves. According to analysts, the International Monetary Funds (IMF) disbursed $3.4 billion in April 2020 and another $3.35 billion in the form of special drawing rights (SDR) allocation in August 2021.

Nigeria also issued $4 billion of Eurobonds in September 2021. MarketForces Africa reported that the government devalued the naira twice in 2020 and 2021, by 23% in March 2020 (to N379 from N306 to the dollar) and a 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.

This will help reduce the pressure on the naira and improve dollar liquidity in the economy, the global rating agency said in the report. It said Nigeria’s significant credit constraints, balanced by some credit strengths supporting the B2 ratings awarded to the country in 2021.

On the negative side, Moody’s 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.

It mentioned that the sovereign’s very weak institutional framework and governance is another credit constraint for Nigeria, which it said reflected in particular in extremely low revenue generation.

“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 added.

Balancing these factors, Moody’s stated that the scale of the economy that is relatively diverse, with services accounting for approximately 50% of the economy, supports the rating.

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.

Environmental, Social and Governance Profile

Nigeria’s environmental, social and governance (ESG) Credit Impact Score is very highly negative (CIS-5), reflecting very high exposure to environmental risk and social risk and very weak governance that, with low wealth levels, leads to low resilience to E and S risks.

“For Nigeria, exposure to environmental risks carries very high credit risks, reflected in its E-5 issuer profile score. Exposure to carbon transition risk is very high, given the very significant reliance on oil.

“Oil accounts for around 50% of government revenue on average and more than 80% of merchandise exports. Nigeria’s credit profile would face downward pressure in a scenario of more rapid global carbon transition than Moody’s currently assumes — and then implied by stated policies internationally.

“Water risk and physical climate risk are also high, driven by the high share of the population exposed to unsafe drinking water, risks of flooding and health stress, as well as risks from waste and pollution respectively.

“Exposure to social risks is very highly negative (S-5 issuer profile score), mainly related to poverty, low education outcomes, and poor health and safety indicators and access to basic services.

“Infant mortality is one of the highest in Sub-Saharan Africa and poverty is widespread, with close to 40% of the population living on less than PPP$1.90 a day despite vast natural resources wealth.

“The successive oil shocks and the pandemic have exacerbated the exposure to social risk. GDP per capita remains well below 2015 figures, with growing inequality due to the most vulnerable households carrying a disproportionate part of the burden of successive shocks”.

Nigeria has a very high negative governance profile score (G-5 issuer profile), reflecting weak control of corruption and rule of law as well as limited fiscal and monetary policy effectiveness and opaque management of public resources, Moody’s stated in the report.

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