Nigeria Still Exposed to Economic Shocks, Moody’s Warns

By Obinna Chima

One of the leading global rating agencies, Moody’s Investors Service, has said Nigeria’s credit profile, at ‘B2 stable’ is constrained by the country’s continued exposure to shocks because of government’s inability to expand non-oil revenue base sufficiently.

The New York-based agency stated this in its annual credit analysis on Nigeria titled, ‘Government of Nigeria: B2 stable, Annual Credit Analysis,’ released yesterday.

It, however, stressed that the report does not constitute a rating action.

“Although oil revenue has risen in 2018, deficits remain elevated relative to revenue and debt affordability is still weak but improving,” Moody’s Vice President, Senior Credit Officer and co-author of the report, Aurélien Mali, explained, adding, “We expect debt levels to remain contained at around 20 per cent of Gross Domestic Product (GDP) in 2019.”

Furthermore, the report noted that credit strengths in Nigeria include the large size of the economy and the country’s robust medium-term growth prospects, supported by strong domestic demand.

The economy emerged from a 2016 recession, though real growth remains subdued, it noted.

As higher oil prices and oil production of around two million barrels per day helped the economy to improve this year, Moody’s forecasts economic growth of 1.9 per cent of GDP this year for Nigeria, up from 0.8 per cent in 2017.

It stated, “Nigeria ranks near the bottom of a number of international surveys assessing institutional strength. Surveys point to the country’s relative weakness compared to peers in respect of rule of law, government effectiveness and control of corruption.

“The sharp decline in oil prices from mid-2014 severely weakened its public finances. General government revenue halved to 5.6 per cent of GDP in 2016 from 10.5 per cent in 2014.

“Since late 2015, the authorities have stepped up their efforts to increase non-oil revenue.

“However, despite these efforts and even though oil prices have recovered to above the budgeted oil price, government revenue has mostly been below target and significantly below pre-crisis levels at around six per cent of GDP.”

It noted that increasing the non-oil tax take remains one of Nigeria’s greatest challenges, stating that only a durable increase in non-oil revenue would improve the country’s resilience to oil price volatility and increase realisation rates of capital spending on the large infrastructure projects that is crucial to its economic development.

According to the report, “Until it does, the government’s balance sheet will be exposed to further shocks. Deficits will remain elevated and debt affordability challenged.

“The stable outlook on Nigeria’s sovereign rating reflects the low likelihood of a shock that further impairs Nigeria’s economic and fiscal strength. External vulnerabilities have receded, supported by a rebound in oil prices and production.

“Structural institutional improvements and reforms that increase the diversification of government revenue away from oil would be positive for Nigeria’s credit profile.

“A sufficient increase in fiscal savings with the potential to offset a protracted economic shock would also be positive,” it added.

In addition, the report stated that “downward pressure could emerge in the event of a prolonged slowdown in growth and investment, an extended deterioration in Nigeria’s fiscal position or further delays in implementing key structural reforms, particularly in the oil sector.”

Nigeria’s GDP growth rate increased to 1.81 per cent (year-on-year) in real terms in the third quarter of the year (Q3, 2018) compared to 1.50 per cent recorded in the preceding quarter, the National Bureau of Statistics (NBS) stated on Monday.

In nominal terms, aggregate GDP stood at N33.36 trillion while real GDP was estimated at N18.08 trillion, according to the Third Quarter GDP report, released by the statistical agency. Growth in Q3 was largely helped by the non-oil sector, which contributed 90.62 per cent to total GDP while the oil sector contributed 9.38 per cent to growth in the review period.

But Oil GDP contracted by -2.91 per cent compared to -3.95 per cent in Q2 and 23.93 per cent in Q3 2017.

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