Fitch Ratings has affirmed Nigeria’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and ‘BB’, respectively. The Outlooks are Stable. The issue ratings on Nigeria’s senior unsecured foreign currency bonds have been affirmed at ‘BB-‘. The Country Ceiling has been affirmed at ‘BB-‘ and the Short-term foreign currency IDR at ‘B’.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflects the following key rating drivers:
Reserves have been rebuilt modestly to USD39.5bn at end-September, owing to a strengthened balance of payments and a rise in the Excess Crude Account (ECA; a fiscal buffer), after a sharp drop from their May 2013 peak of USD48.9bn. Coverage of current external payments (CXP) remains above the peer median at around 5.5 months. The exchange rate has been stable and inflation has remained in high single digits.
The estimated general government budget deficit of 2.7% of GDP in 2013 is small and in line with the peer median, but slightly worse than other similar-rated oil exporters. Spending at the subnational level is less controlled and transparent than at the federal government level, where there is a deficit rule. The absence of comprehensive general government accounts complicates assessments of fiscal performance. Non-oil revenues are low.
The federal government budget outperformed over 1H14 despite pressure for spending ahead of the February 2015 elections. A deficit of NGN325bn (0.4% of Fitch-forecast 2014 GDP) was recorded in 1H, roughly one-third less than the target on a pro-rata basis and the deficit in 1H13. Fitch expects some over-spending at the subnational level, but this will be constrained by improved financial management and the low level of the ECA (USD4.1bn at end-August, up from USD2.3bn at end-2013). Reduced disruption to oil supply and government efforts to lift non-oil revenues and improve public finance management lead Fitch to forecast a general government deficit of around 1% of GDP in 2015 and 2016.
Public and external debt ratios are stable and low compared with peers on a net and gross basis. General government debt was 12.5% of GDP and gross external debt was 9.7% of GDP at end-2013. Debt is well managed. There is a diverse local investor base and local currency debt is in key global bond indices. A recent issue of Ireland-listed global depository notes further broadened foreign holdings of naira-denominated federal government debt. Debt service ratios are also low. Fitch’s debt sustainability analysis shows the debt ratio would remain well below the ‘BB’ median in any plausible scenario.
Economic growth is robust, although slightly less than previously estimated after national accounts rebasing. Real GDP growth averaged 6.1% over the past five years and was 6.4% in 1H14. Non-oil growth has outperformed headline growth due to reforms and rising incomes. Disruption to output has held back the oil sector, although it grew in 2Q14, the first growth in nearly two years. Fitch forecasts growth of 6%-7% each year to 2016, led by the non-oil sector, as the impact of key reforms broadens.
Power and agriculture reforms have progressed. The government is tackling the issues affecting operators after the privatisation of generation and distribution companies in late 2013 and the delayed sale of integrated power projects is at an advanced stage. The introduction of an electronic registration scheme allowed the proportion of farmers receiving subsidised fertiliser to jump to 80% in 2013 from 11% prior to 2011. However, there has yet to be a sustained pick up in power supply and agricultural output is being hit by Boko Haram activity in the north east. With momentum expected to continue after the elections, the reforms should yield notable benefits. However, the Petroleum Industry Bill remains stalled in the legislature and is seriously hampering oil sector investment.
Nigeria scores weakly on the World Bank measure of political stability. The Boko Haram insurgency has worsened and is causing serious disruption to economic activity in parts of the north east. There have been sporadic bomb attacks elsewhere in the country, but in general the insurgency is being contained. Some violence is possible around February’s elections, although two recent state elections were held peacefully.
Nigeria is a net external creditor, in contrast to the ‘BB’ median, and has posted a current account surplus every year since 1998. However, the current account surplus has been declining (4.1% of GDP in 2013) and may be overstated given large negative errors and omissions. FDI is less than 1% of GDP, among the lowest in sub-Saharan Africa.
Nigeria’s ratings are constrained by weak governance, as measured by the World Bank, low human development and business environment indicators and per capita income, and a heavy reliance on oil revenues (around 70% of fiscal revenues and 75% of current external receipts). Nigeria has the world’s 10th-largest oil reserves but reserves and production are low in per capita terms.
