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Announcement:

Moody's: Nigeria's growth is resilient, but limited structural reforms constrain creditworthiness

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

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, S?o Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Edward?Al-Hussainy
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Dietmar?Hornung
VP - Senior Credit Officer
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Nigeria's growth is resilient, but limited structural reforms constrain creditworthiness
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