Nigeria: Moody's Changes Outlook On Govt of Nigeria's Rating to Negative From Stable

Lagos, Nigeria
5 December 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 new status of Nigeria according to the international rating organisation is as a result of what it termed "fragility of the country's public finances and sluggish growth prospects."

Moody explained that 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 per cent 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 per cent of GDP.

"In particular, CBN advances are more expensive than debt-funded on the domestic capital market as the CBN applies a penalty rate on top of its monetary policy rate currently at 13.5 per cent.

"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 per cent from five per cent in 2020. Consequently, debt affordability will remain weak, with general government interest payments at around 25 per cent of revenues in the next few years."

Moody's also projected Nigeria's 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 four per cent of GDP (50 per cent 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 per cent 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 per cent of GDP) in 2019 from NGN12.6 trillion (or 13.2 per cent) 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.

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