NOTE: On December 5, 2019, the press release was corrected as follows: The second sentence of the second paragraph of the RATIONALE FOR THE NEGATIVE OUTLOOK section was removed. Revised release follows.
New York, December 04, 2019 -- Moody's Investors Service ("Moody's) has today changed
the outlook on the government of Nigeria's ratings to negative from
stable. Concurrently, Moody's has affirmed the 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 programme rating.
The negative outlook reflects Moody's view of increasing risks to
the government's fiscal strength and external position. Already
weak government finances will likely weaken further given an extremely
narrow revenue base and persistently sluggish growth that hinders fiscal
consolidation. As pressures mount, there is a risk that the
government resorts to increasingly opaque and costly options to finance
a moderate but rising debt burden. Moreover, vulnerability
to an adverse change in capital flows is building in light of Nigeria's
increasing reliance on foreign investors to fund the country's foreign
exchange reserves.
Moody's decision to affirm the rating at B2 recognizes a combination of
credit strengths including the country's large and diversified economy
supported by vast oil and gas endowments, notwithstanding persistent
credit weaknesses such as its very weak institutions and governance framework
and in particular poor public finance management.
Concurrently, Moody's has maintained Nigeria's country
risk ceilings at their current levels: Foreign Currency bond ceiling
at B1, Foreign Currency deposit ceiling at B3, and Local Currency
bond and deposit ceilings at Ba1.
RATINGS RATIONALE
RATIONALE FOR THE NEGATIVE OUTLOOK
NIGERIA'S PUBLIC FINANCES ARE INCREASINGLY FRAGILE IN A SLUGGISH
GROWTH ENVIRONMENT
The change of outlook to negative is informed by the increasing fragility
of the country's public finances and sluggish growth prospects.
The increasing fragility of Nigeria's public finances is evident
in the greater reliance by the government on financing from the Central
Bank of Nigeria (CBN) over the last three years to cover persistently
large fiscal deficits, with CBN cash advances reaching 2.5%
of GDP on a net basis at the end of September 2019, in addition
to government debt instruments held by the CBN worth 1.4%
of GDP.
Moody's expects general government revenues to remain very low at
around 8% of GDP until 2022, despite measures to such as
the VAT rate increase to 7.5% from 5% in 2020.
Consequently, debt affordability will remain weak, with general
government interest payments at around 25% of revenues in the next
few years.
The administration's focus on increasing infrastructure spending
from very low levels will further exert pressure on fiscal deficits even
if it is likely that much-needed capital expenditure will continue
to be under-realised compared to the budgets, as capex is
curtailed in order to contain the overall budget deficit.
In general, Moody's expects real growth to remain weak,
at just over 2% over the next few years. The economy has
yet to fully recover from the oil price shock of 2015 and the subsequent
recession in 2016; real growth remains below population growth,
denoting an erosion in incomes from already low levels. This low
growth environment makes achieving the government's objectives of
job creation, improvement in social indicators, and fiscal
consolidation via increased revenue collection highly challenging.
The implementation of economic policies to sustainably boost real GDP
growth would alleviate some of the negative credit pressures. However,
the continuation of the current policy mix -- including the rationing
of the supply of US dollars in the economy while suppressing part of the
demand for foreign currency (via the list of items banned from accessing
dollars from official channels, for example) - aimed at supporting
domestic production and job creation over the long term, will constrain
economic growth over the short to medium term.
Overall, given Moody's expectation that general government
fiscal deficits are likely to remain around 4% of GDP (50%
of revenues) and growth subdued over the coming years, rapid debt
accumulation will continue. Moody's expects debt to GDP to
reach N49 trillion by the end of 2021, or 27% of GDP.
While still at moderate levels, debt has accumulated quickly over
the last four years, almost tripling to an estimated NGN33 trillion
(23.2% of GDP) in 2019 from NGN12.6 trillion (or
13.2%) in 2015. This number includes the debt of
the federal government, the states and the municipalities,
the net cash advances from the CBN, as well as the stock of promissory
notes issued to clear past arrears.
EXTERNAL VULNERABILITY IS INCREASING
The negative outlook is also underpinned by rising vulnerability to an
adverse change in external capital flows.
Official foreign exchange reserves at around $40 billion at the
end of October, or 5-6 months of import cover, at first
appear to be relatively comfortable. However, Nigeria's
external position is increasingly dependent on foreign capital inflows
in the form of portfolio investments, which by definition are volatile
and susceptible to reversal. In order to maintain price and exchange
rate stability, the CBN has issued domestic certificates (via Open
Market Operations) to mop up naira liquidity, which has been boosted
following the creation of the import-export windows by the central
bank in 2017. The stock of certificates has grown very quickly
to reach NGN17.4 trillion in September 2019 from NGN5 trillion
in 2017, of which around NGN5.8 trillion ($16 billion)
are currently held by foreign investors.
In order to attract foreign investors, the CBN is paying high interest
rates on these certificates. This policy is very costly,
and with consequent impact on the yields of other government financing
instruments. Importantly, the large holdings of foreign investors
make Nigeria's external position vulnerable to an adverse change
in investor sentiment that could quickly materialize given the short-term
nature of the instruments.
RATIONALE FOR AFFIRMING THE B2 RATINGS
The affirmation reflects credit strengths supporting the B2 rating,
balancing significant credit weaknesses. Nigeria's economic
strength is supported by the diversification of economic activity and
very large oil and gas endowments. Moreover, Nigeria benefits
from deep domestic capital markets to finance a still moderate debt burden
at relatively long maturities. In turn, long average maturity
of debt contributes to moderate borrowing requirements for the government.
Nevertheless, very weak institutions and governance strength,
and in particular poor public finance management, remain a constraint
to Nigeria's credit profile. Meanwhile, only a durable
and significant increase in non-oil revenue would improve the sovereign's
resilience to oil price volatility and provide scope to realize ambitious
capital spending plans on the large infrastructure projects that are crucial
to economic development. In the meantime, the fiscal deficits
will remain elevated, debt affordability will remain weak and the
government's balance sheet will remain exposed to further shocks.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations are not material to the rating. While
Nigeria is potentially exposed to carbon transition, under a baseline
assumption of a relatively gradual transition, global demand for
oil and prices seem likely to remain sustained over the next few decades.
Social considerations are material for Nigeria's credit profile given
the country's very low average income levels, high levels
of poverty, and growing income equalities. 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 in measures of inequality in income, education and health.
Despite vast natural resources wealth, 53.5% of people
live on less than PPP$1.9 a day. Over time,
there is a risk of social unrest potentially affecting growth and the
government's finances. Prolonged and severe unrest could
also dampen foreign investors' willingness to purchase Nigerian
assets, threatening the country's external position.
Governance factors are a material driver of the rating and are captured
in Moody's assessment of Nigeria's institutions and governance
strength. Institutional capacities remain limited and the management
of public resources remains opaque and lacking in effectiveness.
FACTORS THAT COULD LEAD TO AN UPGRADE
An upgrade is unlikely in the short to medium term given the negative
outlook. A return to a stable outlook would likely be prompted
by some of the following developments: (1) a lasting reduction in
reliance on foreign portfolio investors to sustain the level of foreign
exchange reserves; (2) prospects of effective implementation of structural
reforms, particularly with respect to public resource management
and a broadening of the revenue base; and/or, (3) over the
longer term, signs that economic policies are likely to foster stronger
GDP growth on a sustained basis.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Nigeria's rating would likely be downgraded if the sovereign's vulnerability
and exposure to a financing shock increased to an extent no longer considered
consistent with the current rating level, potentially because of:
(1) an increase in external vulnerability risk as foreign investor sentiment
weakened putting pressure on foreign exchange reserves; (2) signs
of a more rapid erosion in fiscal strength than Moody's currently
assumes, in particular if the revenue base seems likely to narrow
further; or (3) materially weaker medium-term growth prospects
than Moody's currently expects.
GDP per capita (PPP basis, US$): 6,027 (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%
(2018 Actual)
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% (2018 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 27 November 2019, 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 fiscal or financial strength,
including its debt profile, has materially decreased. The
issuer has become increasingly susceptible to event risks. Other
views raised included: 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 governance and/or management, have
not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019. 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
(423) 795-37.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Samar Maziad
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
