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Friday 29th March 2024,
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Moody’s Places Nigeria’s Ba3 Rating on Review for Downgrade

Nigeria’s Ba3 Rating

Moody’s Investors Service has placed Nigeria’s Ba3 government bond and issuer ratings on review for downgrade.

A statement from one of the top global rating agency obtained on Tuesday, explained that the purpose of the ratings review was for Moody’s to assess the extent of the impact of the further fall in oil prices, which the agency said it 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.

A downward rating adjustment for Nigeria would most likely be limited to one notch. But Moody’s would maintain and confirm Nigeria’s current Ba3 rating if the rating review were to conclude that the government’s plans represent a clear, credible fiscal and 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. It aims to conclude the review within two months.

Nigeria is highly dependent on hydrocarbons to support economic growth and to finance government expenditure. Oil and gas account for over 90 per cent of goods exports and these exports expressed in percentage of nominal GDP are estimated at roughly 17 per cent of 2016 GDP. It also provides an estimated 40 per cent of consolidated government revenues (but between 60-70 per cent before the oil price shock).

Between September 2014 and September 2015, the oil price roughly halved. Since then, it has fallen a further 40 per cent. Moody’s recently revised its oil price assumptions for Brent to $33 per barrel in 2016 and US$38 per barrel in 2017, rising thereafter to $48 by 2019.

The agency explained: “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 4.3 percentage points and the fiscal deficit increased from 2.3 per cent in 2013 to an estimated 4.2 per cent  in 2015 (which includes estimates of two per cent of GDP of accumulated arrears at state and municipal levels).

“During the same period, the country’s current account balance relative to GDP moved from a surplus of 3.7 per cent to a deficit of 2.8 per cent. 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 per cent of GDP by 2018.

“The roughly 25 per cent 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 per cent in 2013 to 9.6 per cent in 2015. In its effort to manage the currency in the context of external pressures, Nigeria has run down its reserves from $42.8 billion to $28.4 billion, the equivalent of 6.7 months of imports, reducing its external buffers against future shocks.

“However, 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 at end-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 excess of four per cent on average, which — while lower than before the current shock — is still robust compared with peers.”

However, it pointed out that the Nigerian government was 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 sovereiglowest noted that non-oil GDP accounts for 90 per cent of Nigeria’s GDP and offers a large diversified economic base for this reform effort to be successful.

Furthermore, it identified the Treasury Single Account (TSA) as another reform to raise revenue for the country, just as the agency urged the federal government to  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 developed in light of the persistent pressures on the currency. Fiscal buffers include foreign currency assets, which are small at around US$3.7 billion (or roughly 0.8 per cent 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 per cent 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 per cent 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).

 

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