Ratings Agency, Moody’s has released its latest rating on Nigeria. In a press releases dated December 9, 2016, Moody’s said it had affirmed the B1 long-term issuer rating of the Government of Nigeria with a stable outlook. These were the key drivers for the positive review ;
1.) Medium term growth prospects remain robust despite the current challenging environment, with the rebound in oil production helping to rebalance the economy over the next two years;
2.) The government’s balance sheet remains strong relative to its peers, resilient to the contractionary environment and temporarily elevated interest payments while the authorities pursue their efforts to grow non-oil taxes.
The long-term local-currency bond and deposit ceilings remain unchanged at Ba1. The long-term foreign-currency bond and deposit ceilings remain unchanged at Ba3 and B2, respectively.
What it means for Nigerian Equities Market
This is not the first time Moody’s has sounded very positive about Nigeria. However, this review was emphatic about the growth prospects of Nigeria.
Improved dollar earnings
Over the near term, Moody’s expects Nigeria’s economic growth and US dollar earnings to improve in 2017, supported by a recovery in oil production. After an estimated -1.5% real GDP growth in 2016, Moody’s forecasts real GDP growth to rise to 2.5% in 2017 and accelerate further in 2018 to 4%. A rebound in oil production to two million barrels per day (mbpd) will, if sustained, enhance economic growth and support the US dollar supply in the economy.
Likely impact – This bodes well for investor sentiments. Foreign investors have been adamant to return to Nigeria because of the reduction in dollar earnings for the government following the persistent drop in oil prices. Nigeria is also in a recession and a potential return to growth is strong enough to bring back confidence in a market that is desperately in need of one.
Effects of the 2017 Budget
The economy is also likely to benefit from the more timely implementation of the 2017 budget than its predecessor and in particular from the increase in capital spending on infrastructure which that will allow. The scarcity of dollars — worsened by the soft capital controls imposed by the Central Bank of Nigeria — is likely to continue to negatively affect important sectors of the economy especially in services and manufacturing sectors. We do not expect the current policy mix to significantly change over the short term but a gradual easing of restrictions is possible as foreign currency receipts improve with rising oil production
Likely impact – 2016 will mostly be remembered for the budget fiasco that delayed the passage and eventual implementation of the 2016 Federal Budget. The absence of a cohesive fiscal policy also helped worsen the effect of the monetary policy decisions of the CBN. The impact was so severe that it contributed into throwing Nigeria into a recession. The stock market suffered as well, with trillions wiped out of market capitalization, Thus, if the 2017 budget is passed on time and implementation steps up as expected, then the economy could be set for a major fiscal boost. If the budget is implemented and confidence is brought back into the economy, then we can expect to see the gradual return of foreign investors.
Predicting a return of portfolio investors
In 2017 and 2018, we expect Nigeria’s balance of payments to move back into surplus, supported by government external borrowings and a falling current account deficit. The latter is quickly reducing, supported by falling imports and increased oil production. Depreciation of the naira, soft capital controls and current dollar scarcity have been relatively effective at constraining imports. We expect foreign exchange reserves to grow modestly in 2017. While improved foreign investor sentiment should support the rebalancing of the economy over the medium term, with the return of portfolio investors improving dollar liquidity in the country, the continued existence of a parallel, unofficial foreign exchange market is likely to act as a strong deterrent over the near term.
Likely impact – A rejuvenated economy, backed by improved foreign earnings and cheap long term external borrowings takes out a lot of risk for foreign investors. Surely, the activities of the CBN and the rhetorics from the President will remain a major concern but with improved forex reserves it is likely that the CBN will allow the market to operate without restrictions or unnecessary controls.
Finally, the bulls have returned to the stock market in the past few days. We are not surprised as that is typical of December. The real test will be in January when investors come back from the holiday and take out time to preview what the economy holds for 2017. We might also likely see another report from Moody’s and other rating agencies. Till then invest cautiously.