New York, November 07, 2017 -- 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 Inland Revenue
Service (FIRS) 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.
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.
Lucie Villa
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
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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
