Nigeria, Africa largest oil producing country needs to develop other ways of generating revenue apart from oil or face a wide range of challenges in the coming years, Global Credit rating agency, Moody’s Investors Service said.
The New York based firm noted that although Nigeria’s economy, external positions, and public finances were expected to stabilise, its continual dependence on Oil and Gas meant it would face daunting obstacles in the years ahead. Moody’s Vice President and Senior Credit Officer, Aurélien Mali noted that both Nigeria and Angola have seen their credit profiles come under pressure following the oil price shock in 2014.
“The rise in hydrocarbon production will support growth in both countries and will help stabilise their deficits, but revenue generation remains a key weakness for Nigeria, while Angola will find it hard to cut its already sizeable debt load as its kwanza currency continues to depreciate,” Aurélien Mali who is also a co-author of the report said.
Nigeria and Angola are two of Sub-Saharan Africa’s largest economies, accounting for close to 40 percent of the nominal GDP of the sovereigns that Moody’s rates in the region. While increased oil production will support a pick-up in growth in both countries in 2018, they face challenges in attracting more investment in a low oil price environment.
“Nigeria has struggled to reform its oil sector, improve the regulatory environment and increase transparency,” Moody said.
Despite expecting increase in Nigeria oil production, Moody’s also expects renewed attacks on pipelines and key infrastructure in the Niger Delta, which could decrease oil production under the joint ventures (JVs).
The rating agency also believes implementation of the new fiscal framework will support oil production increase under the production sharing contracts (PSCs).
Compared to Nigeria and other regional peers, the Angolan authorities have created a predictable and transparent environment for the oil sector. Since its independence, production has been maintained despite a protracted civil war and contracts have been respected by its national oil company, Sonangol.
For, Angola, its main production challenge is higher costs which are crucial to unlocking future investment. As a result, Moody expects the new administration to offer incentives to attract more investment to at least maintain production levels and avoid significant declines.
Moody said that the higher oil price and fiscal consolidation efforts will shrink deficits to around 2.6 percent of GDP in Nigeria and 2 percent for Angola in 2018. Nevertheless, much-needed budgeted capex will continue to be under-realised and revenue raising measures are likely to continue to falter, especially in Nigeria.
“Increasing non-oil tax intake remains one of the biggest challenges both countries face in the coming years however the Nigerian authorities’ efforts to increase non-oil revenue since late 2015 have been largely unsuccessful,” Moody said in the report released 18 June.
Meanwhile, Angola’s new administration has plans to improve non-oil revenues which will kick off in 2019 with a new property tax and a planned Value Added Tax (VAT). Nevertheless, Moody’s expects revenues to remain at similar or only slightly higher levels in 2018 to 2019, averaging 7.7 percent of GDP for Nigeria and 19.9 percent for Angola.
Angola’s largest credit challenges are its sizeable borrowing requirements and liquidity risks. The country’s general government gross borrowing requirements will be 20 percent of GDP in 2018, a significantly higher level than previously thought while Nigeria’s gross borrowing requirements are lower, estimated at 6.2 percent of GDP in 2018, of which 4 percent of GDP will be funded in the domestic market.
“Though we expect their economies, external positions and public finances to stabilize, a continued dependence on the hydrocarbon sector for growth, foreign currency and revenue means both will continue to face challenges in the next few years,” the New York based rating agency noted.
The report also noted that the increase in Nigeria’s debt profile was much slower in recent years and it expects it to stabilise at around 20 percent of GDP in 2018.
Nigeria’s government is seeking to shift the balance of issuance away from costly short-term domestic debt towards longer-term external borrowing in the Eurobond markets or from multilateral institutions including the AfDB and World Bank.
“We expect that the volume of debt instruments issued by domestic entities will decrease in accordance with the government’s debt strategy. While the country is saving on its interest payments, it increases its exposure to further exchange rate depreciation inflating the external debt burden,” Moody’s said.
