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Global Credit Research - 14 May 2013
New York, May 14, 2013 -- In a new report published today, Moody's Investors Service
says that Nigeria's Ba3 rating balances the economy's robust
growth prospects and the government's limited debt levels against
low per capita income, weak institutions, slow progress in
executing structural reforms, and an acute fiscal vulnerability
to adverse oil price shocks.
The rating agency's report is an annual update to the markets and does
not constitute a rating action.
Nigeria's USD260 billion economy is on track to overtake South Africa
as the largest economy in sub-Saharan Africa by 2020, with
growth momentum being generated by the non-oil --
primarily domestic service-oriented -- sector.
Consequently, Moody's observes that Nigeria's GDP growth
has been remarkably stable in the 6%-8% range,
with negligible sensitivity to the global downturn in 2007-08 and
the subsequent negative oil price shock.
Nigeria has a significant hydrocarbon endowment, with reserves currently
estimated to be around 37.2 billion barrels or around 28%
of total African reserves. Oil exports are essential to the economy
and account for over 85% of total merchandise exports and 60%-70%
of fiscal revenue. However, this dependence on oil exports
exposes the economy to global energy price volatility.
Moody's notes that investment in Nigeria has converged to the median
for Ba-rated sovereigns, following structural reforms and
macroeconomic stability that was achieved by 2010. Nigeria has
also been effective in attracting foreign direct investment relative to
both African and Ba-rated peers. However, despite
elevated levels of investment, the country continues to face a chronic
infrastructure deficit that weighs on productivity and competitiveness.
Nigeria's high growth is also offset by (1) low per capita GDP of
approximately USD1,500 (purchasing power parity), which is
below the median of USD4,200 for Ba-rated peers; (2)
a high incidence of poverty (over 60% of the population live below
the poverty line); and (3) a high unemployment rate, which
disproportionately affects the young (the official unemployment rate is
around 24% and rises to 37% for ages 15-24).
Core institutional deficiencies - a history of opaque economic
policymaking, a high incidence of corruption, and limited
political willingness and capacity to execute critical structural reforms
- anchor Nigeria's rating and exacerbate risks stemming from
weak economic fundamentals Macroeconomic policymaking has improved,
particularly in the area of inflation targeting and financial sector supervision;
however, consolidated budgeting and public financial management,
at both federal and state levels, remains opaque.
Moody's notes that momentum for addressing challenging structural
reforms has slowed. Most critically, legislation to revise
the fiscal regime in the petroleum industry and to deregulate the downstream
oil and gas sector has stalled, holding up significant foreign investment
while the sector's productivity declines.
With 65%-70% of government revenues sourced from
the oil sector, fiscal sensitivity to oil prices is high and the
government's mitigation strategies are a key ratings driver.
In their current form, Moody's views these fiscal buffers
as insufficient: savings of windfall oil revenues in the Excess
Crude Account's (ECA) have historically been volatile and discretionary
withdrawals from the fund by both federal and state levels of government
have undermined the ECA's credibility. Spending by the ECA
has often been pro-cyclical and precludes the expenditure consolidation
necessary to preserve fiscal buffers for a structural downturn in global
oil prices. In 2011, the ECA was ostensibly reformed and
replaced with the Nigerian Sovereign Investment Authority (NISA),
a more transparent sovereign wealth fund with explicit twin long-term
savings and stabilization mandates. However, to date,
Moody's notes that the NISA does not have an operational mandate
and has been seeded with only USD1 billion from the ECA.
These factors are partially offset by the Nigerian government's
significant fiscal space as a legacy of comprehensive debt relief in the
mid-2000s. With government debt below 20% of GDP,
Nigeria's fiscal metrics are superior to most Ba-rated peers.
Vulnerability to external shocks and volatile fiscal buffers are somewhat
offset by the stock of foreign-exchange reserves of USD47.4
billion in 2012. Nigeria also issued a benchmark USD500 million
dollar, 10-year bond in 2011 and Moody's expects the
government to seek additional funding in international capital markets
to finance the infrastructure deficit.
Moody's see elevated risks stemming from the confluence of a violent
nationwide Islamist insurgency and increased militant and criminal activity
in the oil-rich Niger delta. The sabotage of petroleum infrastructure
and theft has resulted in the loss of almost a quarter of Nigeria's
oil output. This violence has the potential to stall foreign investment
and is increasingly a fiscal drag on spending by state and local governments.
While Moody's does not believe Nigeria to be at a tipping point
wherein broad-based social unrest could destabilise the government,
political risks are amplified by the combination of rising poverty and
inequality, political disempowerment, entrenched religious
and ethnic tensions, and extraordinary levels of corruption.
Subscribers can access the report at: http://www.moodys.com/credit-ratings/Nigeria-Government-of-credit-rating-551435
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Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
VP - Senior Credit Officer
Sovereign Risk Group
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Moody's: Nigeria's growth is resilient, but limited structural reforms constrain creditworthiness
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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