Fitch Ratings has affirmed Nigeria’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BB-‘ and ‘BB’ respectively. The Outlooks on the Long-Term IDRs have been revised to Negative from Stable. The issue ratings on Nigeria’s senior unsecured foreign currency bonds are affirmed at ‘BB-‘. The Country Ceiling is affirmed at ‘BB-‘ and the Short-Term Foreign Currency IDR at ‘B’.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. On this occasion, Fitch has decided to publish its review after the scheduled calendar date of 27 March 2015 to avoid publishing our review immediately before Nigeria’s elections. In our view this warrants a deviation from the calendar. Our rationale for the rating action is laid out below.
KEY RATING DRIVERS
The revision of Outlook on Nigeria’s IDRs reflects the following key rating drivers and their relative weights:-
Political uncertainty is heightened in the context of a tightly contested presidential election and potential transition issues. The polls were officially delayed due to security concerns stemming from Boko Haram activity, however violence was very limited on election day and challenges were largely technical in nature. The government has made gains in the past few months in the fight against Boko Haram, but this follows a period in which the group seized large parts of the north east, where the threat remains largely contained.
Fiscal and external buffers have been eroded significantly as Nigeria enters a period of lower oil prices and are well below the levels of the 2008/09 oil price shock. Oil accounts for around 60% of fiscal revenues and 75% of current external receipts. The Excess Crude Account (ECA, the key fiscal buffer) stood at USD2bn at end-2014, down from USD19.7bn at end-2008. Foreign exchange reserves were equivalent to 3.8 months of current external payments at end-2014, compared with 7.8 months at end-2008. Fitch does not expect savings to be rebuilt significantly by end-2016.
High dependence on oil revenues will cause the external position to deteriorate despite a rapid policy response. Fitch forecasts the current account to fall into deficit in 2015 for the first time since 1998 owing to lower oil prices. A modest surplus is expected in 2016.
Economic performance is likely to weaken, although non-oil growth will remain robust. Real non-oil growth is forecast to slow to 5.5% in 2015, from 7.4% in 2014 and an average of 5.6% over the past five years. Non-oil growth will be hit by the devaluation of the naira and election-related uncertainty, but will be less impacted by fiscal consolidation due to the small size of the government. Reforms in the power and agricultural sectors should continue to support underlying momentum. Exchange rate devaluation is forecast to push inflation into low double digits for the first time since 2012.
Nigeria’s IDRs also reflect the following key rating drivers:-
The Nigerian authorities have implemented a rapid policy response, including exchange rate reform and significant fiscal consolidation, in response to lower oil prices. Distortions arising from a multiple currency practice have been eliminated through the closure of the auction windows and the naira has been devalued by a combined 28% since November. The oil price assumption for the 2015 budget has been cut to USD53/barrel (b), with USD55/b used for the remaining two years of the 2016 and 2017 medium-term fiscal framework. New revenue-raising and cost-cutting measures have been introduced and the tax administration strengthened.
Consolidation and devaluation mean the general government deficit is forecast to be little changed from its 2014 outturn of 2.4% of GDP in 2015. The projected deficit is in line with the peer median. Spending at the subnational level is less controlled and transparent than at the federal government level, where there is a deficit rule. The absence of comprehensive general government accounts complicates assessments of fiscal performance. Non-oil revenues are low.
Public and external debt ratios are stable and low compared with its peers on a net and gross basis. General government debt was 12.3% of GDP and gross external debt was 10.5% of GDP at end-2014. Debt is well managed. There is a diverse local investor base and local-currency debt is, and is expected to remain, in key global bond indices. Debt service ratios are also low and the bulk of the 2015 deficit financing will be on a concessional basis. Despite fiscal and external pressure debt ratios are forecast to remain well below peers’ over Fitch’s forecast period.
Nigeria’s ratings are constrained by weak governance indicators, as measured by the World Bank, low human development and business environment indicators and per capita income, and a heavy reliance on oil revenues.
The main factors that could lead to a rating downgrade are:
– A serious and prolonged breakdown in public order
– Erosion of fiscal and external buffers and an inadequate policy response that seriously undermines confidence
– Reversal of key structural reforms
The current rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. However, the following factors could lead to the Outlook returning to Stable:
– A smooth electoral process and reduced political uncertainty
– Strengthened buffers, either in the ECA/international reserves or the sovereign wealth fund
– Containment of fiscal pressures that keep the debt burden manageable
The ratings and Outlooks are sensitive to a number of assumptions:
Fitch forecasts Brent crude to average USD65/b in 2015 and USD75/b in 2016.
Fitch assumes the current stance of relatively conservative macro policy and incremental structural reform will remain in place, although there will be some uncertainty if the opposition wins the elections, as economic policy has not featured prominently in the campaign.
Fitch assumes that the Boko Haram insurgency will continue. Large-scale activity will remain confined to the north east, although sporadic attacks elsewhere in the country are possible. Economic activity, notably agriculture, will remain weak in affected areas. Fitch does not expect a major resurgence of violence in the Delta region.