‘Nigeria’s oil-led recovery supports modest improvement in debt issuers’ credit profiles’


Although Nigeria’s (B2 stable) oil-driven economic recovery will support credit profiles across various sectors, the impact will be modest and fiscal pressures are likely to persist, Moody’s Investors Service said in a report today.
According to Moody’s, “An increase in oil production and higher oil prices support Nigeria’s slow economic recovery and the 2.8 percent growth we expect in 2018,” said Aurélien Mali, a Moody’s Vice President — Senior Credit Officer and co-author of the report. “Public finances are likely to improve modestly alongside this growth, but efforts to improve non-oil revenue remain elusive.
“Over the longer term, the government’s diversification efforts should improve the resiliency of the economy and public finances to oil price volatility.”
The rating agency said, a further increase in oil production, a fall in security threat levels and structural improvements in the sector will drive growth through to 2019.
However, current growth rates are still too low to improve living standards and the current recovery remains mainly cyclical, coinciding with the oil sector recovery. Without further reforms to strengthen the economy’s growth potential, Nigeria is likely to grow at around 3 percent in real terms in the next few years.
Foreign exchange reserves have surged since 2017, exceeding $45 billion by the end of March from $25 billion at the end of 2016. Higher reserves are mainly due to the rebound in oil production and oil prices, combined with the government’s external borrowings and a resumption of foreign capital inflows.
The government’s capacity to increase external borrowing will be constrained by the deterioration of its balance sheet. Outstanding debt is just over three times higher than government revenue.
Although the improved economic growth outlook should support the general government’s finances, deficit and debt reduction at the regional government level are less likely.
Persistent and widening fiscal deficits have led Nigerian regions to carry debt burdens worth over 150 percent of their revenue on average and approximately one fifth of the total general government debt.
States and local governments will mainly use the extra oil revenue to repay some of the existing stock of arrears accumulated over the last few years.
In the banking sector, stronger GDP growth is expected to support a 10 percent increase in banks’ loan books this year following the 15.4 percent contraction in lending in 2017.
Increased lending will support banks’ interest and lending fee income and mitigate lower interest income from a 660 basis points fall in Treasury bill yields from their peak in 2017. Nigerian banks hold large amounts of treasuries for liquidity reasons.
Growth should also lead to modest improvements in banks’ asset quality. Moody’s expects the non-performing loan (NPL) ratio to range between 15.5 percent and 18 percent over the next 12 to 18 months before falling as the negative effects of the 2016 recession begin to wane. Dollar liquidity is also expected to improve.
The outlook for non-financial corporates is becoming increasingly positive, despite some businesses facing foreign exchange challenges.
The agency said, companies are likely to expand capital spending on the back of the improving backdrop of the Nigerian economy and better access to dollars, as well as the recent currency swap agreement between Nigeria and China.
“Despite the improved outlook for the overall sector, challenges remain. Nigerian corporates continue to see electricity supply shortages and high interest rates as the biggest inhibiters to business activity.”