Nigeria’s (B2 stable) credit profile is constrained by the continued exposure of the sovereign balance sheet to shocks, weak institutions and elevated deficits, Moody’s Investors Service said in an annual report today. The country’s credit strengths include the large size of its economy and robust medium-term growth prospects supported, in particular, by its domestic demand.
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, said a Moody’s Vice President Senior Credit Officer and co-author of the report, Aurélien Mali.
“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.”
Nigeria’s economy continues to adjust to the loss of more than 50 per cent of its foreign-currency earnings.
The continuing recovery in oil production underpins Nigeria’s more robust medium-term prospects. With a rebalanced economy, Moody’s anticipates that a further consolidation of Nigeria’s economic fundamentals will strengthen the recovery, with real growth of 3.3 per cent in 2018 and 4.5 per cent in 2019.
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.
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.
Moody’s projects 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 will decline only slightly, to 3.2 per cent of GDP, comprising a 2 per cent of GDP federal government budget deficit and around 1 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.
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.