Nigeria lifted by oil prices

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Nigeria’s outlook has been uplifted to positive from negative by Moody’s Investors Service. This is on the expectation that higher oil prices and some measures taken by the government will help stabilise its credit metrics and support its external position.

Moody’s has also affirmed Nigeria’s long-term issuer and senior unsecured ratings at B2, while the senior unsecured medium-term note program rating has been kept at (P)B2.

The rating agency expects Nigeria’s economy to grow by 2.8% in 2021 and by 3.5% per year on average until 2025.

This recovery is mainly due to low base effects and improved dollar liquidity which has been facilitated by higher oil prices – and the support of international financial institutions (IFIs) such as IMF.

While growth prospects are better than pre-crisis levels, they remain weaker than before the 2016 oil price shock and insufficient to significantly lift living standards given population growth.

Moody’s expects that oil production including condensate will slightly increase in 2022 to reach 1.8 million barrels per day (mbpd) against an estimated 1.7 mbpd in 2021.

Further out, the recent adoption of the petroleum industry act (PIA) has reduced uncertainties that, over more than a decade, significantly weighed on investment in the Nigerian oil and gas sector.

Over the next few years, other sectors including agriculture and services are also likely to perform well because of ongoing government support and improved dollar liquidity respectively.

The affirmation of the ratings reflects Nigeria’s significant credit constraints, balanced by some credit strengths supporting the B2 ratings.

These credit constraints include fiscal and external reliance on the hydrocarbon sector as well as its very weak institutional framework and governance. This is reflected in extremely low revenue generation. Susceptibility to event risk remains mainly driven by political risk.

Nigeria’s public finances have been deteriorating since 2016 due to successive oil prices shocks. The government’s inability to significantly expand the non-oil revenue base means that its balance sheet is exposed to further shocks.

In the next few years, deficits will narrow with the recovery in oil prices, production and some fiscal measures, albeit remaining substantial to average 4.5% of GDP over 2021 to 2025.

Debt affordability will remain very weak and debt levels will increase slightly towards 35% of GDP and stabilise above 400% of revenue.

Moody’s expects general government revenue to be around 6.8% of GDP in 2021, slightly higher than in 2020 at 6.3%; and to gradually increase to reach 8% in 2024 to 2025.

The government’s goal for revenues to reach 15% of GDP by 2025 is unlikely to be achieved or even approached. This is given the institutional capacity constraints and lack of track record in improving public finance.

While the IMF has identified a number of fiscal measures to raise revenue, based on Nigeria’s track record, Moody’s expects only few of the reforms to be fully implemented over the period.

The phasing out of oil subsidies, currently planned by the authorities in 2022, would potentially raise revenue by 1% of GDP, if fully implemented. Moody’s assumes that only some of these fiscal benefits will be realised in the foreseeable future.

In this context of very gradual fiscal consolidation, Moody’s expects liquidity risk to remain contained with gross borrowing requirements around 8% of GDP in the future. This is after they peaked at 9% of GDP in 2020.

Although the government has relied on the central bank funding to finance its deficits since 2018, it has also been able to increasingly rely on its domestic capital markets. These have continued to develop rapidly.

Meanwhile, external government liquidity risk remains limited. External debt service remains manageable, with an average maturity at around 14 years.

Slightly more than half of government external debt is on concessional terms, with 55% owed to multilateral development banks.

Overall, Nigeria’s average external debt service, principal and interest, is relatively small at around $3.2 billion or 0.7% of GDP, per year over the next five years.

The government is likely to continue to favor official sector external borrowing and opportunistic long-term issuance on the international markets.

An increase in oil production and the commissioning of the Dangote refinery in 2022, with full production expected in 2023, will raise exports and lower imports. This will also strengthen Nigeria’s external position in the next few years.

Moody’s expects the current account deficit to be around 1.1% of GDP for 2021 compared to 3.9% in 2020 and it is likely to turn into surplus from 2022 onwards averaging 1% of GDP over 2022 to 2025.

Oil-related products such as fertilisers and petrochemicals currently make up 35% to 40% of the import bill. As the refinery ramps up, local production will substitute imports.

Official foreign reserves stood at $42 billion at the end of October 2021, back to pre-crisis levels after reaching a low of $33 billion in April 2021.

A range of factors have supported reserves. The IMF disbursed $3.4 billion in April 2020 and another $3.35 billion in the form of SDR allocation in August 2021.

Nigeria also issued $4 billion of Eurobonds in September 2021. Lastly, the government devalued the naira twice in 2020 and 2021, by 23% in March 2020.

This moved to approximately $0.9 (₦379) from ₦306 to the dollar, and further 8% in June 2021 to ₦411 from ₦379 to the dollar.

Moody’s expects foreign exchange reserves to continue to increase to $45 billion and $48 billion in 2022 and 2023 respectively.

This is given the anticipated small increase in oil production, sustained oil prices and lower imports, combined with continued debt issuance on international markets and official support.

Even so, this will help reduce the pressure on naira and improve dollar liquidity in the economy.

Over the medium to long term, environmental and social risks represent significant rating constraints for Nigeria.

Weak institutions indicate low capacity to adjust to rising social demands from a fast-growing population earning very low incomes.

It also reflects a low capacity to adjust to the transformation of the government’s revenue and foreign-currency generation capacity implied by carbon transition.

Balancing these factors, the scale of the economy that is relatively diverse, with services accounting for approximately 50% of the economy, supports the rating.

Public sector debt remains moderate as percentage of GDP compared to peers and Nigeria benefits from increasingly deep capital markets.

Liquidity risk appears manageable with long average maturity of debt that contributes to moderate borrowing requirements for the government.

Moody’s would likely upgrade the ratings if the implementation of structural reforms looked likely to be faster and more effective than it currently assumes.

This is particularly with respect to public resources management and a broadening of the revenue base.

Moody’s would also upgrade the rating if there were signs that economic policies were likely to foster stronger GDP growth on a sustained basis which will improve key credit metrics.

The rating agency would likely downgrade the ratings if the country’s vulnerability and exposure to a financing shock increased to an extent no longer considered consistent with the current rating level.

This would be potentially because of a significant increase in external vulnerability risk indicated by prospects of a significant decline in foreign exchange reserves.

It would also be as a result of signs of a deterioration in fiscal strength, in particular if the revenue base did not increase gradually as currently expected.

Moody’s would also downgrade the ratings if there were materially weaker medium-term growth prospects than currently assumed.

This comes after Nigeria’s long-term foreign-currency issuer default rating (IDR) was affirmed at B, by Fitch Ratings, due to a low general government (GG) debt-to- gross domestic product (GDP) ratio – earlier in 2021.

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