S&P Upholds Nigeria’s ‘B/B’ Rating On Rising Oil Prices, Production FX Policy

• Seeks ‘Significant Fall In Fiscal Deficits’

Just soon after a team from the International Monetary Fund (IMF) urged the Central Bank of Nigeria (CBN) to put an end to its foreign exchange intervention policy, which started last April to stabilize the Naira against global currencies, Standard and Poor’s’ Global Rating cited it as a basis for affirming its ‘B/B’ rating and stable outlook.
In its report on Friday, S&P also noted the country’s increased oil production, which has been helped by the peace in the Niger Delta region where the government is encouraging private investors and oil bearing communities to co-own modular refineries, at a time oil prices are looking up.

Other factors, according to the agency include the Federal Government’s external commercial borrowings that have helped to raise foreign currency inflows into the economy in 2017.
The report, while affirming the ‘B/B’ long- and short-term sovereign credit ratings on Nigeria, as well as a long- and short-term Nigeria national scale ratings at ‘ngBBB/ngA-2,’ however noted that the country’s “fiscal consolidation remains slow, while economic growth is improving at a slower pace than we previously envisaged.”

The stable outlook, it said, signals its “assessment that non-oil-sector improvements could support higher economic growth and fiscal revenues over the next 12 months.”
It warned that Nigeria risks losing the ratings “if we don’t see the significant fall in fiscal deficits that we expect in our base case,” assuring also that it could upgrade the country “if we see much higher economic growth prospects than our base case or if Nigeria’s external liquidity indicator improves, perhaps due to further accumulation of international reserves alongside an extension of external debt maturities.”
The ratings, it continued are based by moderate external indebtedness and a relatively low general government debt stock, although debt-servicing costs remain high, just as it “remain constrained by our view of the country’s low economic wealth, weak institutional capacity, lower real GDP per capita trend growth rates than peers at similar development levels, and low monetary policy credibility.”
On institutional and economic profile, S&P noted Nigeria’s weak economic performance, even as “current pace of economic growth remains low relative to peers with similar wealth levels.

“Political decision-making in Nigeria can be unpredictable, since government institutions are relatively weak.”
Also going for Nigeria, it continued, is that “despite underlying tensions and complexities,” the country’s democracy successfully “weathered a transfer of power between different political parties,” in reference to the May 29, 2015 transfer of power from then President Goodluck Jonathan of the Peoples Democratic Party (PDP) to incumbent President Muhammadu Buhari of the All Progressives Congress (APC).
While noting the economy’s 0.8% growth in real terms, in 2017, compared with a 1.6% contraction in 2016 as it recovered from recession driven by improvements in oil prices, increasing foreign currency inflows, and strong agricultural sector performance, even as oil production stabilized at about 1.9m to 2.1m barrels per day, after disruptions in early
2017.

“In the near term, we estimate that the economy will grow at 2.4% of GDP in 2018 (compared with our previous forecast of 3%) and will average 2.8% in 2018-2021.
“Excluding agriculture, the non-oil economy has yet to fully respond to the improving conditions, with modest growth of less than 1% in 2017.
Thus, we expect non-oil-sector improvements will support our forecasts for higher economic growth. However, real per capita GDP growth of negative 0.19% (which we estimate by using 10-year weighted-average growth) remains well below that of peers with similar wealth levels. Nigeria has significant infrastructure and energy shortfalls and low income levels, with GDP per capita estimated at US$1,800 in 2018.”
The S&P report also acknowledged that the country “is taking steps to improve its governance and strengthen the business environment. The latest World Bank Ease of Doing Business Indicators show Nigeria improving 24 places to No. 145 of 190 countries.

“Fiscal budgets are frequently passed well after the year has begun, which delays the government’s responsiveness to economic challenges. We also view decision-making as largely centralized in the person of the president, although we note that the federal system of government helps to redistribute wealth and spread power to some extent.”
Still on the country’s over-reliance on oil revenue, especially when prices are high, S&P believes it exposes “Nigeria to significant volatility, in terms of trade and government revenues. Rising oil prices, a relatively new market-determined exchange rate window introduced in April 2017, and government external borrowings are helping to increase foreign currency inflows into the economy, allowing the central bank to increase foreign-exchange reserve buffers.

The agency also revised its 2017 general-government fiscal deficit estimate to above 5% of GDP, up from its initial 3.5% assumption in September 2017, based on preliminary outturn.
It also estimated annual change in net general government debt at average 3.6% of GDP in 2018-2021, compared with 3% previously, “based on slower non-oil revenue growth compared with budget, transfers by federal government to the lower levels of government remaining at a high level, a faster implementation of capital budget spending, and overall still relatively high deficits of states and local governments.”
The rising oil related revenues, not withstanding, S&P believes fiscal adjustment challenges remain for Nigeria this year.

While states and local governments remain heavily dependent of the month Federation Accounts Allocation Committee (FAAC) distributions and running deficits, expected to remain at around 1% of GDP until 2019, the agency projected an overall general government deficit, excluding “the clearance of fiscal arrears to contractors, suppliers, and lower levels of government.
“If a proposed plan to clear fiscal arrears, estimated between 2% and 3% of GDP, is approved by the national assembly in 2018, through the issuance of Naira-denominated debt securities, it could increase our deficit and debt projections by the same margin.

“Overall, we forecast that Nigeria’s gross general government debt stock (consolidating debt at the federal, state, and local government levels) will average 27% of GDP for 2018-2021, comparing favorably with peer countries’ ratios. We also anticipate that general government debt, net of liquid assets, will average 18% of GDP in 2018-2021.”
“We include debt of the Asset Management Corporation of Nigeria (AMCON; around 5% of 2018 GDP)–created to resolve the nonperforming loan (NPL) assets of the Nigerian banks–in our calculation of gross and net debt. Over 70% of government debt is denominated in Naira.

http://investdata.com.ng/2018/03/sp-upholds-nigerias-b-b-rating-rising-oil-prices-production-fx-policy/#more