Moody’s Investors Service has again affirmed the B1 long-term issuer rating of the Government of Nigeria with a stable outlook.
The ratings agency pointed out the following as key drivers of their assessment:
1.) Medium term growth prospects remain robust despite the current challenging environment, with the rebound in oil production helping to rebalance the economy over the next two years;
2.) The government’s balance sheet remains strong relative to its peers, resilient to the contractionary environment and temporarily elevated interest payments while the authorities pursue their efforts to grow non-oil taxes.
The long-term local-currency bond and deposit ceilings remain unchanged at Ba1. The long-term foreign-currency bond and deposit ceilings remain unchanged at Ba3 and B2, respectively.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE RATING AT B1
ROBUST GROWTH OUTLOOK SUPPORTED BY ONGOING REBOUND IN OIL PRODUCTION
Moody’s expects Nigeria’s medium term growth to remain robust, driven by the recovery in oil output.
Over the near term, Moody’s expects Nigeria’s economic growth and US dollar earnings to improve in 2017, supported by a recovery in oil production. After an estimated -1.5% real GDP growth in 2016, Moody’s forecasts real GDP growth to rise to 2.5% in 2017 and accelerate further in 2018 to 4%. A rebound in oil production to two million barrels per day (mbpd) will, if sustained, enhance economic growth and support the US dollar supply in the economy.
The government has made significant gains in terms of governance and transparency in the oil sector. Improved availability of data, progress in restructuring the Nigerian National Petroleum Company (NNPC), rising effectiveness of operations at the refineries and a readiness to tackle difficult issues with partners (such as funding issues at the Joint Ventures) speak to a material improvement in the operating environment. The Petroleum Investment Bill (PIB bill), which had been blocked for 8 years in parliament, has been reactivated with a portion of the law drafted and passed by the Senate. Moreover, militant activity in the Niger Delta is set to wane following the resumption of payments from the government, though it will remain a threat to the recovery of the economy.
The economy is also likely to benefit from the more timely implementation of the 2017 budget than its predecessor and in particular from the increase in capital spending on infrastructure which that will allow. The scarcity of dollars — worsened by the soft capital controls imposed by the Central Bank of Nigeria — is likely to continue to negatively affect important sectors of the economy especially in services and manufacturing sectors. We do not expect the current policy mix to significantly change over the short term but a gradual easing of restrictions is possible as foreign currency receipts improve with rising oil production.
In 2017 and 2018, we expect Nigeria’s balance of payments to move back into surplus, supported by government external borrowings and a falling current account deficit. The latter is quickly reducing, supported by falling imports and increased oil production. Depreciation of the naira, soft capital controls and current dollar scarcity have been relatively effective at constraining imports. We expect foreign exchange reserves to grow modestly in 2017. While improved foreign investor sentiment should support the rebalancing of the economy over the medium term, with the return of portfolio investors improving dollar liquidity in the country, the continued existence of a parallel, unofficial foreign exchange market is likely to act as a strong deterrent over the near term.
RESILIENT GOVERNMENT BALANCE SHEET STRONGER THAN PEERS’ DESPITE TURBULENCE
Moody’s expects the medium-term impact of the oil price shock on Nigeria’s government balance sheet to be contained, and recent erosion of debt affordability to be reversed.
The effect of the recent downturn on the government’s budget sheet has been contained as the authorities have been able to offset the shortfall in revenue with large cuts in capital expenditure. As a result, Moody’s forecasts a budget deficit of 3% of GDP in 2016, comprised of a 2% of GDP federal government budget deficit and around 1% of arrears split between federal, state and municipality levels of government.
Moody’s forecasts the federal government deficit to remain around 2% of GDP in 2017 and 2018, with large capital expenditure outlays resuming as the government’s cash flow situation improves. Based on these underlying projections, Nigeria’s balance sheet will continue to compare favourably with peers’, with government debt remaining well below 20% of GDP over the coming years against 55% median for B1-rated peers.
By end-2016, Moody’s estimates the government debt stock will be comprised of 85% domestic borrowing and 15% external debt, resulting in a manageable external debt profile. Government external debt amounts to just 2.9% of GDP, with interest payments set to remain low, at around $330 million dollars per annum. Domestic debt has increased significantly in recent years, reaching its current level of NGN10 trillion. Around 30% of this debt is comprised of costly T-bills, which have increased refinancing risk and interest rate exposure. However, Moody’s expects the ratio of interest payments to government revenues to peak at 20% for general government, and close to 40% of revenues for federal government in 2017.
Although debt service costs are high, Nigeria’s domestic capital market is sufficiently developed to accommodate the yearly public sector borrowing requirements of around NGN5.5 trillion. This is another positive credit feature that distinguishes Nigeria from many similarly rated peers. The country’s banking sector is well-capitalised and liquid and the national pension fund still has additional capacity. Should banking sector liquidity decline, the Central Bank of Nigeria has tools at its disposal to support appetite for government securities, including lowering the cash reserve requirement ratio from its presently high level of 22.5%. However, appetite for government securities remains strong, with all instruments remain oversubscribed.
Moody’s expects the recent increase in debt service costs to prove temporary, as a result of i) the government’ initiatives to expand the non-oil revenue base, and ii) efforts to improve the structure of government debt.
Measures by the Federal Revenue Inland Service are expected to increase non-oil revenue to around NGN4 trillion in 2016 from NGN2.5 trillion in 2015. These include a tax amnesty on penalties and interest on tax liabilities due in 2013, 2014 and 2015. However, not all the initiatives have proven successful: the independent re-appropriation of revenues from the ministries departments and agencies (MDAs) has yielded disappointing results so far. Such outcomes highlight the considerable execution risks inherent in the transition to a less oil-dependent federal budget, and the implications for the government balance sheet should it not meet its objectives.
The government’s medium-term debt strategy should also help to lower the interest burden. The debt strategy is geared towards exchanging costly short-term debt with long-term concessional borrowing. Although a portion of future external borrowings are expected to be raised through the Eurobond markets, this is likely to be complemented with ongoing support from other multilateral institutions including the African Development Bank and the World Bank. The combined effect of these measures should help to bring interest payments/general government revenues down to 16.8% by 2018, from an estimated 19.8% in 2016.
RATIONALE FOR THE OUTLOOK AT STABLE
The stable outlook is driven by Moody’s view that the downside risks posed by the weakening of the country’s fiscal strength, and the external and economic pressures anticipated this year and next, are balanced by Nigeria’s strengths, which exceed those of sovereigns rated below B1. In 2016, Nigeria’s external vulnerability indicator of 31% will remain far below the expected B1 median of 51%, while its debt-to-GDP of 16.6% will remain far below the expected B1 median of 55%. Set against that, its expected debt servicing burden in terms of interest payments to revenue of 19% is more than double the B1 median of 9%. To a large extent, Moody’s believes that this reflects Nigeria’s underdeveloped public sector revenue base, a credit weakness that the administration is attempting to address.
WHAT COULD CHANGE THE RATING UP
Positive pressure on Nigeria’s issuer rating will be exerted upon: 1) successful implementation of structural reforms by the Buhari administration, in particular with respect to public resource management and the broadening of the revenue base; 2) strong improvement in institutional strength with respect to corruption, government effectiveness, and the rule of law; 3) the rebuilding of large financial buffers sufficient to shelter the economy against a prolonged period of oil price and production volatility.
WHAT COULD CHANGE THE RATING DOWN
Nigeria’s B1 issuer rating could be downgraded in the event of 1) a greater-than-anticipated deterioration in the government’s balance sheet or continued erosion of debt affordability, for example resulting from the failure to implement revenue reform; and 2) lower than expected medium term growth, for example as a result of delays in implementing key structural reforms, especially in the oil sector, or continued militancy in the Niger Delta, which undermine the level of oil production over the medium-term.
GDP per capita (PPP basis, US$): 6,184 (2015 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1.5% (2016 Estimate) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 19% (2016 Estimate)
Gen. Gov. Financial Balance/GDP: -2.9% (2016 Estimate) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.6% (2016 Estimate) (also known as External Balance)
External debt/GDP: 4.2% (2016 Estimate)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 7 December 2016, a rating committee was called to discuss the ratings of the Government of Nigeria. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed. The issuer’s susceptibility to event risks has not materially changed. Other views raised included: the issuer’s institutional strength/framework, have not materially changed. The issuer’s governance and/or management, have not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
The Local Market analyst for this rating is Aurelien Mali, +971 (423) 795-37.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
