Reviews & Outlooks | |
Reviews & Outlooks | |
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Friday,
December 06, 2019 / 07:25 PM / By Adesola Borokinni, Proshare Research / Image
Header Credit: Wikipedia
Moody's Investors Service, one of the global credit rating
agencies, in its most recent report, changed its outlook on Nigeria's credit
ratings to negative from stable. Moody's affirmed its B2 long-term local and
foreign currency issuer ratings, the B2 foreign currency senior unsecured
ratings, and the (P) B2 foreign currency senior unsecured MTN program rating on
the country. According to the rating agency, the negative outlook reflected
Moody's view of increasing risks to the government's fiscal strength and
external position.
The report sends a strong signal to prospective investors who would have otherwise loved to take advantage of the huge market size of the Nigerian economy. The report expressed concerns that the country's weak government finances will worsen. The report further noted that the government would likely resort to increasingly opaque and costly options to finance a rising debt burden. The increased vulnerability of the economy to changes in capital inflows would see a deteriorating outcome for Nigeria's foreign reserves (see chart 1 below).
The Trouble With FX
A major concern raised by Moody's report is the increase in the Nigeria foreign portfolio attributable to high increasing yields in bonds and government securities, so it has to attract foreign investors and stabilize the naira. The economy's increasing reliance on FPI is costly and increases the exposure of Nigeria's foreign reserves to external and domestic shocks. The central bank needs to prioritize its objectives and revisit its primary and secondary objectives. The monetary authorities, as far as foreign analysts are concerned, should not be concerned with exchange rate stability if such stability comes at the cost of crowding out private sector investment, thereby increasing the vulnerability of the economy to external and domestic shocks.
Chart 1
Nigeria's Foreign Reserves January-November 2019
Source: National Bureau
of Statistics, Central Bank of Nigeria
Moody's
recent report has identified the upward trajectory of Nigeria's debt profile as
an issue that needs handling. Debt has accumulated quickly over the last four
years, almost tripling to an estimated N33trn (23.2% of GDP) in 2019 from
N12.6trn (or 13.2%) in 2015. Analysts have expressed heightened fears about the
Federal government's request for approval for an additional $29.9 bn loan to
meet up with Nigeria's infrastructural gap in transportation, electricity and
roads (see chart 2 below).
Chart 2 Nigeria's
External Debt Level 2011-June 2019
Source: National Bureau
of Statistics (NBS)
The
questions that pop into the minds of average Nigerians would be; how judiciously
will the loan be used? What are the terms and conditions of the loan? What are
the intended sources of loan repayment? What are the immediate and long-term
effects of the loan on their lives? Regardless of the claims of the minister of
finance that Nigeria is not in debt distress, financial observers are still uncomfortable
with the economy's debt vulnerability (the debt service to revenue ratio is currently
above 60%).
Priming The Revenue Pump
The
Moody report observed that there was a need for the Nigerian economy to expand
much faster, especially concerning its annual revenues. The rating agency
forecasts that Nigeria's revenue will remain around 8 percent of GDP until 2022.
To improve its revenue sources, the federal government has embarked on tighter
fiscal policy, such as an increase in V.A.T to 7.5% (from 5%), and an increase
in the tax net, as Nigeria has one of the lowest tax to GDP ratios in the world.
Local economists note that to avoid the adverse impact of excessive borrowing
on future generations of Nigerians, the fiscal authorities need to resist the temptation
of resorting to additional external borrowing to finance growth.
Moody's
report noted the "sluggish" growth in the Nigerian economy, which brings to
mind the following questions; How aggressive is the government in pushing GDP
growth rate above population growth? What is the government doing wrong in its
macroeconomic management? How can it right the wrongs?
Nigeria's
local news media recently reported that each of the 36 states of the federation
(including Abuja FCT) made a habit of paying significant pension outlays to
former state executives (and in the case of Abuja, FCT Ministers). Against the background of ballooning recurrent
public sector expenditures, it appears necessary for the different levels of
governments to cut back on the cost of governance. Analysts have also argued
that both the States and federal governments privatize their state-owned
enterprises (SOEs) to re-invest cash generated from such sales into self-sustaining
infrastructure.
Nigeria's
relatively slim GDP growth (GDP grew by 2.28% in Q3 2019) is evident (see chart 3
below), considering the economy's dependence on a struggling oil
sector, which has worsened over time.
Although various administrations have come up with plans to diversify
the economy away from a softening oil sector to other sectors, these plans have
been ineffective in the face of a weak agricultural value chain. The local agricultural value chain has failed to link agriculture to an overall concept
of efficiency and productivity.
Chart 3
Nigeria's GDP Growth (%) Q1 2018 -Q3 2019
Source: National Bureau
of Statistics (NBS)
Moody's
report noted reservations as regards continuation of the current heterogeneous monetary
policy mix of the central bank-including the rationing of the supply of U.S
dollars in the economy while suppressing part of the demand for foreign
currency aimed at supporting domestic production and job creation over the long
term, describing it as a policy that will constrain growth over the short to
medium term. To be sure, no economy has ever survived using a policy of autarky
or economic isolation.
Evaluation
of the country's "temporary" border closure and forex restriction, at first
glance, presents itself as a step in the right direction, but analysts have
noted that the government policymakers should be more concerned about improving
domestic productivity and developing competitive advantage, than engaging in
restrictive trade practices.
Moody evaluation and the
common man
The
government's policies so far have had minimal impact on the average Nigerian
citizen, and this poses a serious socioeconomic problem. The poverty level,
unemployment rate (23.1% in Q3 2018) and misery index for Nigeria are troubling.
There is a high degree of correlation between the unemployment rate and the
rate of crime.
The Moody report equally observed that the
Nigerian economy was at risk of social unrest on the back of low average income
levels, high rates of urban and rural poverty and worsening income inequality. Indeed,
if no attention is addressed to a growing sense of frustration amongst the
general population, Nigeria could witness mass protests similar to those in
countries like Iraq, Venezuela, Lebanon and Chile with similarly unhelpful outcomes.
According
to the report, Nigerian policymakers need to pay closer attention to the impact
of policies on the average citizen and not just their impacts on the local elite.
The Way forward
A major takeaway from the recent downgrade of the country's credit rating by Moody is that certain policy actions are needed to protect social and economic stability, amongst which include the following;
Postscript
The
Moody report suggests that the fiscal and monetary authorities in Nigeria need
to urgently review policy in the light of their adverse impact on economic growth
and employment. How far they can go would depend on how far their aspirations
can carry them, so far, the prognosis has not been glowing.
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