Moody’s affirms Nigeria’s Ba3 FG issuer rating with stable outlook

Moody’s Investors Service on Friday affirmed Nigeria’s Ba3 Federal Government issuer rating with a stable outlook.

The affirmation of the Ba3 issuer rating with a stable outlook of the Federal Government of Nigeria (FGN) was based on three key rating factors, according to Moody’s.

These are: the strength of the federal government balance sheet, despite budgetary pressures stemming from the current low oil price environment; Nigeria’s robust medium-term real GDP growth prospects, despite the current economic slowdown; and the successful democratic presidential elections which provide an opportunity for the country to improve institutional strength and governance.

In a related move, Moody’s lowered Nigeria’s foreign currency ceiling for bonds to Ba2 from Ba1, which reflects a somewhat higher risk that the government would impose a moratorium on other external borrowers in the event of its own severe financial distress.

While overall Nigeria’s external vulnerability remains relatively low, Moody’s notes that the lowering of the foreign currency bond ceiling takes into account the recent restrictions imposed by the monetary authorities to conserve the central bank’s foreign exchange reserves.

Additionally, Nigeria’s local currency bond and bank deposit ceilings remain at Baa3, and the foreign-currency ceiling for bank deposits is unchanged at B1.

Both on a standalone basis and relative to peers, general government debt is very low, estimated at 14 percent of GDP in 2015 against a Ba-rated median of 45 percent of GDP, and with an external debt component that is only 2.2 percent of GDP, mostly on concessional terms.

Although interest payments have increased to 17.9 percent of revenues, owing in part to the drop in revenue, government liquidity is ensured by a strong domestic capital market that could absorb even larger deficits.

Moody’s estimates that the general government deficit will come in at 4.2 percent of GDP, of which 2.2 percent is the FGN’s deficit following the approval of the supplementary budget law, with the rest stemming from the accumulation of arrears at the level of the states and municipalities.

The government may also use its newly consolidated Single Treasury Account (STA), which holds in excess of NGN 1.6 trillion ($8 billion), to finance part of its deficits.

Despite an even lower budgeted oil price of $38/barrel proposed for 2016, the government plans to undertake revenue enhancement and expenditure cutting measures to narrow the consolidated deficit to between 2% and 3% of GDP in 2016. These include efforts being deployed to increase non-oil revenue (one of the lowest collections in the world relative to GDP), VAT especially. On the spending side, the plans focus mainly on reducing current spending, with the enhanced transparency of the STA deterring corruption and promoting increased efficiency throughout government agencies.

Moody’s notes that the budget consolidation will face considerable execution risks, but expects some progress to be achieved as early as next year.

Moody’s expects Nigeria’s rapid demographic expansion and the associated growth in such non-oil sectors as construction and services, alongside improving power availability, will continue to support a robust growth rate. Additionally, the resumption of some infrastructure projects (thanks to an expansionary budget geared towards growing capital spending) will gradually support faster growth. Economic activity is thus likely to accelerate in 2016, benefiting in particular from the base effect of the electoral-related slowdown and the intensification of the fight against Boko Haram in 2015.

Once the economy is fully adjusted to a lower oil price environment, Moody’s says Nigeria will probably return to its long-term potential growth rate of 5 percent to 6 percent. This pace would assist the government’s fiscal consolidation and structural reform efforts.