New York, April 15, 2020 -- Moody's Investors Service ("Moody's") has today
affirmed Nigeria's B2 long-term issuer ratings and senior
unsecured rating and its (P)B2 senior unsecured MTN programme rating and
maintained the negative outlook.
The negative outlook continues to reflect the material downside risks
to Nigeria's creditworthiness identified when the outlook on the
sovereign's rating was changed to negative in December 2019.
However, those risks have increased since then, exacerbated
by the oil price shock and the financial and economic implications of
the coronavirus outbreak. The rapid and widening spread of the
outbreak and related price shocks are creating an unprecedented credit
shock across a wide range of regions and markets. For Nigeria,
these shocks amplify existing credit vulnerabilities both over the immediate
and longer term. In the near term, the significant drop in
oil revenues will reduce an already extremely low tax base, undermining
fiscal strength. Combined with possible capital outflows,
pressure on the fragile balance of payments may intensify, threatening
external stability. In the longer term, the impact of the
coronavirus on growth, particularly in the large informal sector,
may weaken economic strength. The sovereign's very low institutions
and governance strength is likely to constrain the effectiveness of government
measures to buffer the impact of the economic and financial shock.
The risk of such stresses materializing is rising, and while the
negative outlook also encompasses longer-term challenges,
downward pressure may materialize relatively early on in the outlook horizon.
While not Moody's current expectation, indications that the
government was contemplating participation in broader debt relief initiatives
with negative consequences for private sector creditors would be negative
for the rating.
Set against these rising pressures, Moody's affirmation of
Nigeria's B2 ratings also takes into account the government's
relatively low debt burden in relation to GDP and commensurately low annual
borrowing requirements, its low external debt service needs over
the next few years and the capacity of the large banking sector to absorb
more government debt. These credit features lower the probability
of imminent and severe liquidity or balance of payments stresses relative
to some 'B'-rated peers.
Nigeria's country risk ceilings remain unchanged at their current
levels: the foreign-currency bond ceiling at B1, the
foreign-currency deposit ceiling at B3, and the local-currency
bond and deposit ceilings at Ba1.
RATIONALE FOR MAINTAINING THE NEGATIVE OUTLOOK
As a result of the oil price fall in the face of depressed oil demand
and a slow supply response, Moody's now assumes that oil prices
will average US$40-45 per barrel in 2020, and US$50-55
by 2021, around $20 and $10 below previous expectations
in each year. Risks to that forecast are firmly to the downside.
Beyond 2021, Moody's currently assumes that oil prices will
return in a medium-term range of $50-70 per barrel,
as demand recovers and supply adjusts further.
As a large oil exporter, Nigeria heavily relies on the oil sector
which accounts for around 50% of government revenues and more than
80% of merchandise exports proceeds. Lower oil prices in
the next two years will weaken Nigeria's credit profile by negatively
affecting the government's public finances and the country's
external position, exacerbating the near- and longer-term
downside risks to the B2 rating already identified when the outlook on
the sovereign's rating was changed to negative in December 2019.
While the fiscal and external implications of the coronavirus outbreak
manifest immediately, in the current environment the downside risks
to Nigeria's rating also relate to the longer-term implications
for the sovereign's economic strength, should the economy
not recover fully once the epidemic subsides.
FISCAL AND EXTERNAL WEAKNESSES EXACERBATED BY CORONAVIRUS-RELATED
OIL PRICE AND FINANCING SHOCK
Nigeria's public finances are increasingly fragile. Given
the already extremely low government revenue base (at around 8%
of GDP pre-shock), the significant loss of oil-related
fiscal revenue will exacerbate the persistent fiscal deficits and raise
the debt burden.
At unchanged oil production levels (between 2.0 and 2.2
million barrels per day including condensates), Moody's estimates
that a $10/barrel decrease in oil price leads to a $3-$3.5
billion loss in government revenue (around 0.7% of 2019
GDP or close to 10% of general government revenues). Additionally,
coronavirus-related spending to prevent its spread throughout the
country is expected to further widen the fiscal deficit.
While in relation to GDP, Nigeria's fiscal and liquidity metrics
are not weaker than seen for other B2-rated sovereigns, very
low revenue magnifies the impact of the oil proceeds shortfall on Nigeria's
challenges to finance essential expenditure and service its debt.
Moody's expects the deficit and government's borrowing requirements
to widen by around 1% of GDP this year compared to its pre-shock
projections, to around 5% and 8.5% respectively.
Meanwhile, as a ratio to revenue, the general government's
debt burden will rise by around 120 percentage points to about 430%,
with interest payments absorbing more than 30% of revenue compared
with around 20% previously expected.
On the external side, vulnerability relates to the expected widening
in the current account deficit and to possible capital outflows in light
of Nigeria's significant reliance on foreign investors to fund the country's
foreign exchange reserves.
The current account, which turned into a substantial deficit estimated
at 3.6% of GDP or $17 billion in 2019, will
deteriorate further adding pressure on declining foreign exchange reserves.
Taking into account a probable slowdown in imports as GDP growth falls,
Moody's estimates that the current account balance will move to
a deficit of more than 5% of GDP this year. Although Nigeria's
foreign exchange reserves are currently adequate to cover imports and
external debt payments, they are vulnerable to a deterioration in
investor sentiment. Indeed, foreign portfolio investors'
holdings of central bank certificates are significant, amounting
to an estimated $12.5-15 billion at the end of 2019.
With the widening current account deficit, a further decline in
reserves (from $35 billion at the end of March 2020 and $38.6
billion at the end of last year) could exacerbate foreign capital outflows,
which in turn would accelerate the decline in reserves.
LONGER-TERM DOWNSIDE RISKS TO ECONOMIC STRENGTH
Over the longer term, the fiscal and external vulnerability risks
mentioned above combine with the risk that a largely informal economy
is more deeply and negatively affected by the coronavirus outbreak than
Moody's currently assumes. This could undermine the economic
strength provided by a large and diversified economy supported by vast
oil and gas endowments.
Consistent with Moody's global assumptions, the rating agency
projects Nigeria's GDP growth to start rising again next year,
from a contraction in 2020, as global economic activity resumes
more normally, oil prices rise and domestic containment measures
are lifted. However, there is a risk that Nigeria's
majority of very low-income households face a longer-lasting
negative shock if the informal sources of revenue that they rely on do
not recover. Rising dollar scarcity in the economy may also constrain
real GDP growth to a greater and longer extent than Moody's currently
RATIONALE FOR AFFIRMING NIGERIA'S B2 RATINGS
Moody's decision to affirm the rating at B2 balances features which exacerbate
these increasingly acute financing and growth pressures, and others
which mitigate them.
On the negative side, the B2 rating reflects the significant credit
constraints arising from Nigeria's weak institutions and governance,
that are likely to impede an effective response by the government to the
economic and financial shock.
Set against that are credit features which lower the probability of imminent
and severe liquidity or balance of payments stresses relative to regional
and rating peers facing similar pressures from the spread of the coronavirus
and the oil price shock. In particular, Nigeria benefits
from a relatively low public debt stock as a share of GDP, commensurately
low annual borrowing requirements and long external debt maturities that
lower external debt service needs over the next few years. It also
possesses a deep domestic capital market and a large banking sector with
capacity to absorb more government debt.
Despite rapid debt accumulation since 2015, to an estimated NGN34.2
trillion (23.5% of GDP) in 2019 from NGN12.6 trillion
(or 13.2%) in 2015, the government's debt burden
measured in relation to the whole economy's sources of revenue (GDP)
remains relatively moderate compared to peers. The government's
annual financing needs are similarly moderate at around 8% of GDP
-- though its weak ability to raise revenue magnifies the challenge
posed by any refinancing needs somewhat.
The domestic capital market is likely to be able to absorb higher borrowing
needs by the government at moderate costs given the current relatively
low exposure of the banking system to government securities (estimated
at 12% of banking assets at the end of 2018). Moreover,
as has been the case in the last three years, the government is
likely to continue to rely on central bank financing under an existing
The government's external debt amounts to only 6% of GDP
with an average maturity exceeding 14 years, and the depth of its
domestic capital market has allowed the government to also issue domestic
debt at relatively long maturities (more than 7 years on average),
which lowers its financing needs. Moreover, slightly more
than half of government external debt is on concessional terms,
with almost half owed to multilateral development banks. Overall,
Nigeria's external debt service (principal and interest) is small,
around $2-2.5 billion (0.5% of GDP)
per year in the next five years. Looking across the broader economy,
the country's External Vulnerability Indicator is well below 100%
and is expected to remain so, indicating adequate coverage by reserves
of near-term economy-wide maturities.
Together, these features provide some assurance that Nigeria has
the finances and the access to supportive funding needed to weather the
current storm and support the B2 rating.
Moreover, while the government's capacity to mitigate the
shock will be severely tested, the authorities have taken some measures
that will limit the more immediate risks. They have started to
adjust the official exchange rate and the import-export window,
announced a supplementary budget law based on a $30 dollar per
barrel oil price (instead of the current $57), phased out
oil subsidies and called for $7.2 billion in financial support
from international financial institutions including the World Bank,
the IMF and the African Development Bank (Aaa stable).
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are not material for Nigeria's rating.
As an oil producer and exporter, Nigeria's environmental risks derive
from carbon transition. Nigeria's credit profile would face downward
pressure in a scenario of rapid global transition to lower reliance on
hydrocarbons that would depress global hydrocarbon demand and prices.
However, in light of the measures against climate change taken so
far, this is not Moody's baseline.
Social considerations are material for Nigeria's credit profile given
the country's very low average income levels and high levels of poverty.
Nigeria ranked 157 out of 189 countries in the 2018 UN's Human Development
Index, with particularly low rankings (last decile) in infant mortality
rate and measures of inequality in income, education and health.
Despite vast natural resources wealth, more than half the population
lives on less than PPP$1.9 a day. Prolonged and intense
social unrest in protest against living conditions could have a marked
negative impact on growth, government finances and foreign investors'
willingness to purchase Nigerian assets, threatening the country's
external position. More immediately, Moody's regards
the coronavirus outbreak as a social risk under its ESG framework,
given the substantial implications for public health and safety.
As explained above, the direct and indirect credit implications
of the health shock are material for Nigeria.
Governance considerations are material to Nigeria's credit profile and
are a driver of this action. Moody's assessment of Nigeria's institutions
and governance strength is very weak at "caa3". Institutional
capacities remain limited and the management of public resources remains
opaque and lacking in effectiveness.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely in the short to medium term given the negative
outlook. A return to a stable outlook would likely be prompted
by the implementation of a credible fiscal and economic policy response
from the government that mitigated the immediate fiscal and external vulnerability
risks, and limited the long-term negative economic and social
implications of the coronavirus outbreak.
Moody's would downgrade the rating if it were to conclude that Nigeria's
government was unlikely to be able to alleviate the damage to its revenues
and its balance sheet, and the subsequent rise in liquidity and
external risk. Downside risks could escalate rapidly in the event
of further downward pressure on oil prices that deepened and lengthened
the revenue shock for the government and/or an intensification of capital
outflows that jeopardized macroeconomic stability. While not Moody's
current expectation, indications that the government was contemplating
participation in broader debt relief initiatives with negative consequences
for private sector creditors would be negative for the rating.
Over the longer-term, increasing clarity that Nigeria's
economic strength has been durably weakened by the impact of the coronavirus
outbreak on the economy and society beyond Moody's current assessment
would also place downward pressure on the rating.
GDP per capita (PPP basis, US$): 5,967 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.9% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 11.4%
Gen. Gov. Financial Balance/GDP: -4.5%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.3% (2018 Actual) (also
known as External Balance)
External debt/GDP: 11.2% (2018 Actual)
Economic resiliency: b2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 09 April 2020, a rating committee was called to discuss the rating
of the Nigeria, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have materially decreased. Other views
raised included: The issuer's institutions and governance strength,
have not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed. The
issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 this rating is Aurelien Mali, +971
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating outcome
announced and described above.
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
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MD - Sovereign Risk
Sovereign Risk Group
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Client Service: 852 3551 3077
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653