Wednesday, November
08, 2017 3:15PM / Moody’s Research & Ratings
Moody's Investors Service has today downgraded the Government of
Nigeria's long-term issuer and senior unsecured debt rating to B2 from B1 and
the senior unsecured MTN program rating and the provisional senior unsecured
debt rating to (P)B2 from (P)B1. The rating outlook remains stable.
The key drivers are as follows:
1. The authorities' efforts to address the key structural weakness
exposed by the oil price shock by broadening the non-oil revenue base have so
far proven largely unsuccessful.
2. As a consequence, while debt levels remain contained and
notwithstanding recent cyclical improvements, the government's balance sheet
remains structurally exposed to further economic or financial shocks, with
interest payments very high relative to revenues and deficits elevated despite
cuts in capital spending.
The stable outlook reflects the fact that the likelihood of a shock
occurring that would further impair Nigeria's economic and fiscal strength
remains low, with external vulnerabilities having receded supported by the
rebound in oil production, the current account projected to remain in surplus,
and reserves boosted through external borrowings and increased foreign capital
inflows. Medium-term growth prospects are also credit supportive.
Concurrently, Moody's has lowered the long-term foreign-currency bond
ceiling to B1 from Ba3 and the long-term foreign currency deposit ceiling to B3
from B2. The long-term local-currency bond and deposit ceilings remain
unchanged at Ba1.
Ratings Rationale
Rationale for Downgrade to b2
The authorities' efforts to increase non-oil revenue have so far proven
largely unsuccessful, with key structural weaknesses persisting
The first driver of the rating action is Nigeria's slower than
anticipated progress in addressing its key structural weakness, which is its
significant reliance on a single sector to drive government revenues as well as
growth and exports. The oil shock severely weakened Nigeria's public finances,
with general government revenues suffering a 50% decline between 2014 and 2016
(from 10.5% of GDP to 5.3% respectively).
The damage wrought by the oil price shock has not yet been undone, and
the downgrade reflects Moody's view that this weakness in Nigeria's public
finances will remain for some years to come; Moody's forecasts general
government revenue to average only 6.4% of GDP over 2017-2019, the lowest level
of any sovereign rated by Moody's.
The results of the authorities' efforts to increase non-oil revenue
since late 2015, which have focused on improving compliance and broadening the
tax base, have been limited and negatively impacted by a contractionary
environment in 2016. The Federal Revenue Inland Service (FRIS) has been able to
increase non-oil revenue by 15% in nominal terms as of September 2017 compared
to 2016, but this is at a pace that is below nominal GDP growth.
Meanwhile, the independent re-appropriation of revenues from the
ministries, departments and agencies (MDAs) has yielded less than projected
results for two consecutive years, highlighting the considerable execution
risks inherent in the transition to a less oil-dependent budget.
Hence, while the rebound in the oil price and in oil production has led
to oil revenues out performing the 2017 budget target, non-oil tax revenues are
still below target with a 30% shortfall for the federal government at the end
of September compared to budget and likely a similar situation for states and
municipalities.
The challenges on the revenue side will negatively impact potential
growth. Since 2014, the authorities have offset revenue shortfalls with large
cuts in much needed capital expenditure, a trend that Moody's expects to
continue. In 2017 the government is likely to only match 2016 capital spending
that reached NGN1.2 trillion (or 1.2% of GDP), given the 2017 budget is
expected to run on a six-month cycle (for capital expenditures only) as the
2018 budget is likely to be passed in January. This is less than 50% of the
2017 budget for capital spending and still an insufficient level to have a
meaningful impact on the large infrastructure gap that significantly constrains
the country's potential growth.
While Debt Levels Remain Contained, The Government's Balance Sheet
Remains Exposed to Further Shocks.
As a consequence of the inability to expand the non-oil revenue base,
the government's balance sheet will remain exposed to further shocks. Deficits
will remain elevated and debt affordability will remain challenged, despite
debt levels remaining contained. That exposure will persist notwithstanding the
recent improvements in the economy, which are primarily cyclical and related to
the strengthening in the oil sector.
Moody's projects a general government budget deficit of 3.6% of GDP in
2017, down from 4.7% in 2016. In 2018, the deficit will decline only slightly
to 3.2% of GDP, comprised of a 2% of GDP federal government budget deficit and
around 1% of GDP deficit at the state and municipality levels plus some arrears
that are likely to be split between the three levels of government.
This is nearly double the general government deficits of 1.9% of GDP
averaged between 2010 and 2015. While Nigeria's general government deficit
compares favourably to the 5.5% and 4.6% of GDP median budget deficit for B1-
and B2-rated sovereigns, the challenges it poses are magnified by the country's
underdeveloped revenue base: Nigeria's budget deficit is equivalent to roughly
half of total general government revenue—a ratio much weaker than the median of
B-rated sovereigns.
Relatedly, debt service is consuming an ever larger share of government
revenue. At the federal level, debt service accounted for 38.2% of total
revenues by the end of June, up from 29% in 2014 and 23% in 2013. At the
broader general government level, the ratio of interest payments to general
government revenues peaked at just under 30% in 2016, 10 percentage points
above what the rating agency anticipated in December 2016 when it affirmed the
previous rating of B1 and over four times higher than the B2 median of 6.6% in
2017. Moody's expects the ratio of interest payments to general government
revenues to only slowly decline to 28.4% in 2017.
While debt levels remain low, outstanding general government indebtedness
has increased by around 50 per cent in recent years. Moreover, around a quarter
of the NGN15 trillion of domestic debt outstanding at the end of June 2017 is
comprised of T-bills, increasing refinancing risk and interest rate exposure.
With inflation likely remaining elevated over the next two years, interest
rates are likely to decline only slowly: Moody's expects inflation to decline
gradually from its 2016 peak of 18.6% to around 14% at the end of 2017 and 12%
at the end of 2018.
The 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 African
Development Bank (AfDB) and World Bank (The). However, the impact of this
strategy will be slow to materialise: Moody's estimates that external debt will
represent 25% of general government debt by end-2017, versus 20% a year before.
Nigeria's existing financial buffers are too small to provide any meaningful
cushion against protracted oil price volatility or other shocks. As at the end
of October, the excess crude account (ECA) stood at $2.4 billion and the
National Sovereign Investment Authority (NSIA) at $2 billion, equivalent to
merely 0.6% and 0.5% of GDP respectively.
Rationale for The Stable Outlook
The stable outlook reflects Moody's view that the risk of a shock
occurring that would further impair Nigeria's economic and fiscal strength
remains low, in part because of the recent improvement in the growth outlook
and the measures taken to address foreign exchange shortages.
Nigeria's economic growth and US dollar earnings are likely to continue
to improve over the coming two years, albeit driven primarily by a recovery in
oil production and revenues and relatedly in the availability of foreign
exchange, rather than by a deepening of the non-oil economy.
In 2017, oil production has been steadily growing to currently reach 2.2
mbpd (including condensates). The government has tripled the amnesty programme
payment to militants over the next two years to reduce the likelihood of
production disruptions. The absence of further arrears on cash calls in Joint
Ventures (JVs) this year has led some oil majors to consider further large
investments in JVs from 2018. Moody's baseline scenario assumes a slow but
steady increase in oil production, averaging 2.3 mbpd between 2018 and 2020.
Moody's expects real GDP growth to reach 3.3% in 2018, compared to 1.7% in 2017
following the -1.5% contraction in 2016.
External vulnerabilities have receded. Foreign exchange reserves are
expected to reach $38 billion at the end of 2017, albeit partly as a
consequence of increased external indebtedness. Since the creation of the
export-import window by the Central Bank in April 2016, net capital inflows
have reached $5 billion and dollar liquidity -- one of the main reasons for the
economic contraction of 1.5% in 2016 -- has improved. Nigeria's current account
has moved back further into surplus, supported by the pickup in both oil
production and oil prices, and will likely average 1.5% in of GDP during 2018
and 2019. The overall balance of payments will benefit from government external
borrowings and improved foreign capital inflows. At 24% in 2018, Moody's
expects that Nigeria's External Vulnerability Indicator (the ratio of near-term
economy-wide external outflows to foreign exchange reserves) will remain well
below the B2 median of around 64%.
What Could Change The Rating Up
Positive pressure on Nigeria's issuer rating could be exerted by: (1)
the successful implementation of structural reforms, particularly with respect
to public resource management and the broadening of the revenue base; (2)
material improvement in institutional strength with respect to corruption,
government effectiveness, and the rule of law; (3) the rebuilding of large
financial buffers sufficient to shelter the economy against a prolonged period
of oil price and production volatility.
What Could Change The Rating Down
Nigeria's B2 issuer rating could be downgraded if Moody's concluded that
the sovereign's exposure to a financing shock had materially increased, perhaps
because of (1) continued erosion of debt affordability or a material
deterioration in the government's balance sheet in some other respect; or (2)
materially weaker medium-term growth, for example as a result of delays in
implementing key structural reforms, especially in the oil sector, or continued
militancy in the Niger Delta, which undermine the level of oil production over
the medium-term.
GDP per capita (PPP basis, US$): 5,936 (2016 Actual) (also known as Per
Capita Income)
Real GDP growth (% change): 1.7 % (2017 Estimate) (also known as GDP
Growth)
Inflation Rate (CPI, % change Dec/Dec): 14.4 % (2017 Estimate)
Gen. Gov. Financial Balance/GDP: -3.6 % (2017 Estimate) (also known as
Fiscal Balance)
Current Account Balance/GDP: 1.8 % (2017 Estimate) (also known as
External Balance) External debt/GDP: 7.7 % (2016 Actual)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 02 November 2017, a rating committee was called to discuss the rating
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 institutional strength/ framework, have
not materially changed. The issuer's fiscal or financial strength, including
its debt profile, has materially decreased
The principal methodology used in these
ratings was Sovereign Bond Ratings published in December 2016. 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 these ratings 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.
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