World Bank to back Nigeria’s budget with $2.5 bn

…ratings outlook tied to domestic reforms – S&P

The World Bank has agreed to assist Nigeria with a multi-billion dollar loan package to help fund its 2017 budget proposals, provided Africa’s largest economy moves quickly on long delayed reforms.
“The World Bank has agreed to a $2.5 billion budget support for Nigeria,” Ayomide Mejabi, economist at Stanbic IBTC Bank said at the Standard and Poor’s risk conference in Lagos.
“The first tranche of $1.5 billion is tied to reforms of the FX market by the Central Bank of Nigeria (CBN).”
The CBN removed a currency peg in June, 2016 but continued to intervene to keep the naira at about N315 against the U.S. dollar, compared with almost N500 on unofficial, black-market.
The lack of an economic plan some 20 months since Nigerian President, Muhammadu Buhari came to power, has stalled the disbursing of up to $5 bn in loans from the Africa Development Bank (AfDB), World Bank and other foreign sources.
The World Bank loan would help plug a budget deficit of N2.2 trillion ($7 billion) for 2016 and fund a record budget of N7.3 trillion for 2017 aimed at stimulating the economy.
Nigeria’s 2017 Federal budget intends to finance its fiscal deficit (estimated at 2 % of GDP) largely through borrowings with 46 percent of planned issuance coming from foreign sources.
Movement on domestic reforms by the Federal Government would be the most important driver of Nigeria’s sovereign ratings outlook in the future, according to Gardner Rusike, S&P Associate Director for Sovereign Ratings.
“There are some upsides to government revenues from higher average oil prices in 2017, which can only be tapped if they negotiate a settlement on the production side,” Rusike said in Lagos.
“The Government needs to solve domestic issues of oil production, boost non-oil revenues and fix the FX issue.”
S&P Global Ratings downgraded Nigeria further into junk territory in September, amid low oil prices and severe shortages of foreign exchange.
S&P rates Nigeria’s at B with a stable outlook, five levels below investment grade and in line with Kyrgyzstan and Angola.
Moody’s Investors Service and Fitch Ratings Ltd. each downgraded Nigeria to four levels below investment grade in the first half of 2016.
Nigeria has seen government revenue squeezed by the fall in global oil prices to roughly half their levels from 2014.
In addition, attacks claimed by militants in the oil-producing Niger Delta region pushed monthly crude exports to decade lows last year.
S&P expects Nigeria’s economy to contract 1 percent in 2016 before returning to growth.
Higher oil prices and production should drive growth to rebound by 1 percent this year, according to Mejabi of Stanbic IBTC.
The Federal Government intends to unveil its Economic Growth and Recovery Plan by the end of February, according to government officials.
The plan which shows that the government is now willing to adopt a flexible market-determined exchange rate, according to Documents seen by BusinessDay, should enable the World Bank loan negotiations to proceed smoothly.
Nigeria recently priced $1 billion of 7.875% Eurobonds due February 2032 to fund capital expenditures in the 2016 budget which were approximately eight times oversubscribed.
“Strong demand for the Eurobond, while slightly positive, is more a reflection of low developed market yields. At the end of the day, the FX issues still remain in Nigeria,” Mejabi said.