Nigeria’s failure to diversify leads to constrained credit profile

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Nigeria’s credit profile (B2 stable) is constrained by the sovereign balance sheet’s continued exposure to shocks because the government has been unable to expand its non-oil revenue base sufficiently, Moody’s Investors Service said in a report today.

The research is an update to the markets and does not constitute a rating action.

“Although oil revenue has risen in 2018, deficits remain elevated relative to revenue and debt affordability is still weak but improving,”said Aurélien Mali, Moody’s Vice President – Senior Credit Officer and co-author of the report. “We expect debt levels to remain contained at around 20% of GDP in 2019.”

Credit strengths include the large size of the economy and the country’s robust medium-term growth prospects, supported by strong domestic demand. The economy has emerged from a 2016 recession, though real growth remains subdued.

Higher oil prices and oil production of around 2 million barrels per day helped the economy to improve this year. Moody’s forecasts economic growth of 1.9% of GDP this year, up from 0.8% in 2017.

Nigeria’s ranks near the bottom of a number of international surveys assessing institutional strength. Surveys point to the country’s relative weakness compared to peers in respect of rule of law, government effectiveness and control of corruption.

The sharp decline in oil prices from mid-2014 severely weakened its public finances. General government revenue halved to 5.6% of GDP in 2016 from 10.5% in 2014. Since late 2015, the authorities have stepped up their efforts to increase non-oil revenue.

However, despite these efforts and even though oil prices have recovered to above the budgeted oil price, government revenue has mostly been below target and significantly below pre-crisis levels at around 6% of GDP.

Increasing the non-oil tax take remains one of Nigeria’s greatest challenges. Only a durable increase in non-oil revenue will improve its resilience to oil price volatility and increase realisation rates of capital spending on the large infrastructure projects that are crucial to its economic development.

Until it does, the government’s balance sheet will be exposed to further shocks. Deficits will remain elevated and debt affordability challenged.

The stable outlook on Nigeria’s sovereign rating reflects the low likelihood of a shock that further impairs Nigeria’s economic and fiscal strength. External vulnerabilities have receded, supported by a rebound in oil prices and production.

Structural institutional improvements and reforms that increase the diversification of government revenue away from oil would be positive for Nigeria’s credit profile. A sufficient increase in fiscal savings with the potential to offset a protracted economic shock would also be positive.

Downward pressure could emerge in the event of a prolonged slowdown in growth and investment, an extended deterioration in Nigeria’s fiscal position or further delays in implementing key structural reforms,particularly in the oil sector.

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