Moody’s: Nigeria’s Credit Profile Constrained by Vulnerability to Shocks, Elevated Deficits

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Obinna Chima
Nigeria’s (B2 stable) credit profile is constrained by the continued exposure of the country’s balance sheet to shocks, weak institutions and elevated deficits, Moody’s Investors Service stated in its annual report on Monday.

The rating agency noted that the country’s credit strength includes the large size of its economy and robust medium-term growth prospects supported by its domestic demand.

The report was titled: ‘Government of Nigeria — B2 stable, Annual credit analysis.’
Moody’s anticipated that a further consolidation of Nigeria’s economic fundamentals would strengthen the country’s economic recovery, with real growth projected to rise to 3.3 per cent in 2018 and 4.5 per cent in 2019.
Moody’s projected a general government budget deficit of 3.6 per cent of GDP in 2017, down from 4.7 per cent in 2016.

In 2018, the deficit was expected to decline slightly to 3.2 per cent of GDP, comprising two per cent of federal government’s budget deficit and around one per cent of GDP deficit at the state and municipality levels, as well as arrears that are likely to be split between the three levels of government.

“Only a durable increase in non-oil revenue will improve Nigeria’s resilience to oil price volatility and increase the realisation rates of capital spending on the large infrastructure projects that are crucial for Nigeria’s economic development,” Moody’s Vice President — Senior Credit Officer and co-author of the report, Aurélien Mali said. “Until it does, the government’s balance sheet will remain exposed to further shocks. Deficits will remain elevated and debt affordability will remain challenged.

“This exposure will persist, despite recent improvements in the economy, which are primarily cyclical and related to the strengthening of the oil sector,” Mali added.
According to the report, Nigeria’s economy has continued to adjust to the loss of more than 50 per cent of its foreign-currency earnings.
It also stated that the continuing recovery in oil production underpins Nigeria’s more robust medium-term prospects.

“Nigeria’s ranks near the bottom of many international surveys assessing institutional strength and its scores are among the weakest within Moody’s rated universe.
“President Muhammadu Buhari, who was elected in May 2015, and his administration have sent strong signals that the “business as usual” environment is over.

“There is greater transparency and accountability, as well as resolve to fully implement the rule of law.
“The government has also made significant gains in terms of governance and transparency in the oil sector.
“There has been also no further build-up of arrears on cash calls in Joint Ventures in 2017 beyond those recorded previously which sends a strong positive signal to international oil companies present in Nigeria,” it added.
The sharp decline in oil prices from mid-2014 severely weakened Nigeria’s public finances. General government revenue halved to 5.3 per cent in 2016 from 10.5 per cent of GDP in 2014.

Since late 2015, the authorities have stepped up efforts to increase non-oil revenue in response to a significant deterioration in public finances. Furthermore, the report stated: “Nigeria’s moderate susceptibility to event risk in part reflects the waning of Niger delta insurgency and the return of alert levels to minimum levels.

“Islamist militant group Boko Haram has lost all its strongholds and territory due to a concerted effort by neighbouring countries and support from the international community. However, Boko Haram remains present in the North-east of the country.”