Fitch Ratings has affirmed Nigeria's Long-term foreign and local currency Issuer Default Rating (IDRs) at 'BB-' and 'BB' respectively. The Outlooks on the Long-term IDRs are Negative. The issue ratings on Nigeria's senior unsecured foreign-currency bonds are also affirmed at 'BB-'. The Country Ceiling is affirmed at 'BB-' and the Short-term foreign-currency IDR at 'B'.
KEY RATING DRIVERS
The affirmation reflects the following factors:
The political uncertainty that preceded the 2015 elections has subsided and power has transitioned peacefully to the administration of Muhammadu Buhari, who was sworn in in May. This is the first democratic transition of power to an opposition party in Nigeria, and highlights the strengthening of political institutions. President Buhari has prioritised improving security, reducing corruption, and fostering economic growth and job creation. Progress is being made in tackling Boko Haram, although the group retains a significant presence in parts of the northeast.
The extended absence of a cabinet has caused delays in implementing economic policy, which has dented credibility at a time of significant challenges posed by lower oil prices, and significant uncertainty remains, particularly around the currency. To support the exchange rate, the central bank introduced measures that made foreign exchange unavailable for certain activities and were cited in the decision to remove Nigeria from the JP Morgan global benchmark bond index. Planned tax increases under the previous administration have not been implemented and the bulk of the fiscal adjustment burden has been absorbed by cutting capital spending. The composition of the new cabinet will provide an important guide to the policy direction of the new government.
Economic growth has slowed sharply in 2015, although it is set to rebound in 2016 and remains robust relative to peers. Lower oil production, election-related uncertainty, fiscal consolidation and restrictions on access to foreign exchange held back real GDP growth to 3.1% in 1H15, compared with an average of 5.6% over the previous five years. With uncertainty over economic policy expected to ease and continued dynamism within the private sector, we forecast real GDP growth to rebound to an average of 5% over 2016 and 2017.
We forecast the general government deficit to widen this year, but at 3.1% of GDP it will be lower than 'BB'-rated peers. A currency devaluation in February and strengthened efforts to boost tax collection administration are supporting revenues. Some state and local governments have run up arrears, but these are being addressed by a rescheduling programme that restructures about USD1.6bn in short-term bank loans into 20-year federal government bonds. The restructuring will result in significant interest rate savings to state and local governments and cause only a small increase in the sovereign's debt burden. There has been no progress in rebuilding savings buffers, with the Excess Crude Account standing at USD2.2bn in mid-September 2015.
Deficit financing will push up debt. Nonetheless, public and external debt ratios will remain low compared with peers, with public debt-to-GDP projected by Fitch at 14.4% at end-2015 and gross external debt at 14.2% of GDP, and the bulk of new financing will be on a concessional basis. A large and diverse local investor base means that Nigeria's ejection from the JPM benchmark global bond index in September will not cause financing strains.
Administrative restrictions have allowed a modest rebound in foreign exchange reserves, to USD31bn (4.5 months of current external payments) at end-August compared with a peer median of four months. With lower oil prices pulling the current account into deficit, rebuilding reserves, which fell by 30% in the year to June 2015, will pose challenges in the absence of an exchange rate adjustment. The earlier devaluation is filtering into inflation, which was 9.3% in August and is set to reach double digits in 2015 for the first time since end-2012. Inflation has consistently been above the peer median.
Significant reform has been initiated at the Nigerian National Petroleum Corporation (NNPC), the state oil company. A major restructuring has taken place, transparency has been increased and measures introduced to improve the commercial viability of NNPC operations. The new government has also bolstered efforts to increase revenue collection and widen the tax base. Both of these areas could help ease the government's revenue constraints, but progress in these areas will be a medium-to-long term prospect.
Nigeria's ratings are constrained by weak governance indicators, as measured by the World Bank, as well as low human development and business environment indicators and per capita income. The economy is heavily dependent on oil, which accounts for around 75% of current external receipts and around 60% of general government revenues.
RATING SENSITIVITIES
The main factors that could lead to a rating downgrade are:
-A policy response to lower oil prices that undermines growth prospects, public finances or external stability
-A loss of foreign exchange reserves or an increase in government debt/GDP
-Reversal of key structural reforms and anti-corruption and transparency measures.
The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. The following factors, however, could lead to the Outlook returning to Stable:
-Implementation of monetary and exchange rate policies consistent with macroeconomic and external stability
-Containment of fiscal pressures and a manageable debt burden.
KEY ASSUMPTIONS
Fitch forecasts Brent crude to average USD55/b in 2015, USD60/b in 2016 and USD70/b in 2017.
Fitch does not expect a major resurgence of violence in the Delta region.
