On March 20, 2015, Standard & Poor's Ratings Services lowered its long-term foreign and local currency sovereign ratings on the Federal Republic of Nigeria to 'B+' from 'BB-'. We affirmed the short-term ratings at 'B'.
In addition, we removed these ratings from CreditWatch, where they were placed with negative implications on Feb. 10, 2015. The outlook on the long-term ratings is stable.
At the same time, we lowered our long-term national scale rating on Nigeria to 'ngA' from 'ngAA-'. We affirmed the short-term national scale rating at 'ngA-1'.
RATIONALE
Following the fall in crude oil prices in spot and futures markets of about 50% since September 2014, we revised our oil price assumptions significantly downward for 2015-2018 and this has had an impact on a number of rated oil exporting sovereigns including Nigeria (see "Plummeting Prices Weigh On Ratings For Some Oil Exporting Sovereigns," published on Feb. 11, 2015, on RatingsDirect). Nigeria relies on oil and gas for about two-thirds of its fiscal revenues and over 90% of its exports, and the oil price fall has had an impact on its macroeconomic indicators, most markedly its current account position.
We expect an average current account deficit of 1.8% of GDP in 2015-2018. We estimate that narrow net external debt (external debt minus liquid external assets) will average 23% of current account receipts (CARs) in 2015-2018. We expect gross external financing needs to average 129% of CAR in 2015-2018, compared with 81% in 2012-2014.
The monetary policy of the Central Bank of Nigeria (CBN) targets keeping inflation to single digits, partly by attempting to maintain broad exchange rate stability against the U.S. dollar. During the second half of 2014, owing largely to the fall in oil prices, depreciation pressures on the naira began to build. This prompted the CBN to raise interest rates, permit a devaluation of the naira, and impose some administrative restrictions on foreign exchange transfers in November 2014. Depreciation pressures continued, and in February 2015 the CBN abandoned its sales operations via the subsidized retail Dutch Auction System (rDAS) and opted to buy and sell through the interbank market. This eliminated a bifurcated foreign exchange market and permitted a further depreciation of the naira, thereby conserving foreign exchange reserves. In our view, however, the exchange rate and monetary policy could continue to come under pressure due to the fall in oil prices, political risks, or changes in investor risk appetite.
The fall in the oil price prompted the federal government to proactively respond and sharply revise its proposed 2015 federal budget (excluding state and local governments). The most recent revised draft budget, submitted to parliament in February 2015, proposes significant cuts in capital expenditure alongside cuts in recurrent spending (compared with last year's budget). The government based its latest revenue calculations on a US$53 per barrel (/bbl) oil price (reduced from an initially budgeted $77.5/bbl), 2.27 million barrels of production per day (down from a budgeted 2.38 million barrels per day in the 2014 budget), and an exchange rate of 190 Nigerian naira (NGN) to US$1. The falling exchange rate will support fiscal revenue (the naira is already trading below NGN190:$1), while due to the oil price fall there will be savings on the fuel subsidy bill. The federal government has stated that it may consider additional cuts or tax measures if the oil price falls significantly further. Nevertheless, in our view, the tightly contested general elections and potential underperformance on oil production may pose risks to the implementation of the federal economic management team's proactive and ambitious fiscal consolidation plans.
The 2015 federal budget also requires approval by both houses of parliament and is likely to be passed only after the upcoming March 28/April 11 elections. The federal government has advised state governments to adjust their state budgets in line with the forecast fall in oil revenues. Nevertheless, several states are reported to be running arrears on supplier contracts and wages, and fiscal balances at the state level are likely to suffer significantly. Although state spending is largely capped by the states' limited ability to borrow, states may be forced to run significant arrears. This may be partially mitigated by potential tax hikes after the election.
Overall, we forecast that Nigeria's general government debt stock (consolidating debt at all levels of government) will grow by 2.5% of GDP per year on average in 2015-2018. Although nominal gross general government debt has increased in recent years, we expect it to compare favorably with peer countries' ratios at around 20% of GDP for 2015-2018. We also anticipate that general government debt net of liquid assets will average 15% of GDP in 2015-2018. We include debts of the Asset Management Company of Nigeria (AMCON) in our calculation of gross and net debt, in line with our treatment of such entities elsewhere. Over 80% of government debt is in the domestic currency, which mitigates the impact on the government's debt burden of the recent naira depreciation. Gross debt as a share of general government revenues presents a less positive picture, at 143% in 2015.
Political tensions remain high as the general elections approach. President Goodluck Jonathan and the ruling People's Democratic Party (PDP) is facing a significant challenge from the All Progressive Congress (APC) and its leader, retired general Muhammadu Buhari. Political risks may further test Nigeria's institutions or external and fiscal resilience.
In addition, the insurgency led by the militant Islamist group Boko Haram continues in the northeast, despite repeated military and diplomatic efforts to counter it. Barring sporadic attacks in the rest of the country, the issue so far remains largely contained in the northeast(in Borno, Adamawa, and Yobe states), however, and it is reported that the army's most recent offensive (in the past few weeks) may have put the group on the defensive. Nigeria's election commission cited the most recent anti-Boko-Haram operation and wider security concerns when on Feb. 7 it postponed the presidential and national assembly elections to March 28 and the governorship and state elections to April 11.
In 2015-2018, we expect annual real GDP growth to average 5%, with per capita GDP growth averaging 2.4%, in spite of the troubles in the northeast and the fall in oil prices. Nevertheless, real GDP growth is down from our forecast of average GDP growth of 6.2% for 2015-2017 that we published in September 2014.
GDP growth is increasingly being fueled by non-oil growth. After a GDP revision last year, services--the fastest growing sector--is estimated at over 50% of GDP (from about 30% previously) while agriculture represents about 20% (from a previously estimated 35% of the economy), and the oil and gas sector now accounts for about 14% of GDP, down from 32%. A series of reforms, including in agriculture, and the rapid growth of sectors such as telecoms and
financial services, have contributed to non-oil growth momentum. However, oil production has stagnated, as new investment holds out for the passage by parliament (most likely to be after elections) of the long-awaited Petroleum Investment Bill, but also becomes less attractive due to the fall in the oil price and ongoing oil theft in the sector.
The Nigerian banking sector may face asset quality, profitability, and potentially liquidity pressures in the next year. The sources of weakness are likely to be around oil loans, utilities, manufacturing, and U.S. dollar exposures. In our view, mid-tier banks are likely to be the most at risk. Nevertheless, regulation, and governance over the past few years has improved, and may help limit potential downside risks.
Our local currency rating on Nigeria is equalized with the foreign currency rating because, in our view, the monetary policy options that underpin a sovereign's greater flexibility in its own currency are constrained by Nigeria's broadly managed exchange rate regime and still relatively small domestic financial markets.
OUTLOOK
The stable outlook reflects our view that Nigeria's non-oil economy will continue to support GDP growth and that external and fiscal balances will not increase significantly above our current expectations.
We could lower the ratings if Nigeria's external and fiscal positions deteriorate beyond our current expectations, or if Nigeria's policymaking and institutional stability weaken significantly.
We could consider an upgrade if external factors improve considerably (for example due to a sharp or prolonged rebound in the oil price), or if Nigeria's external and fiscal balances perform well above our expectations.
