…Knocks FG on weak governance
By Amechi Ogbonna
Fitch Ratings has affirmed Nigeria’s Long-term Foreign-currency Issuer Default Rating (IDR) at ‘B+’ with a negative outlook.
The agency noted however that Nigeria’s current ratings were 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.
According to the agency, Nigeria’s latest ratings are supported by its large and diversified economy, significant oil reserves, its net external creditor position, low external debt service ratio and large domestic debt market. These are balanced against relatively low per capita GDP, an exceptionally narrow fiscal revenue base and a weak business environment.
The negative outlook reflects the downside risks from rising government indebtedness and the possibility of a reversal of recent improvements in foreign currency (FX) liquidity and a faltering of its fragile economic recovery. Against this backdrop, Fitch forecasts growth of 1.5 per cent in 2017 and 2.6 per cent in 2018, after the country’s first contraction in 25 years in 2016. It noted that although Nigeria’s GDP growth continued to contract in 1Q17, it was less than the records for the previous four quarters.
Meanwhile, Fitch has said the country’s recovery will be driven mainly by increased FX availability to the non-oil economy and fiscal stimulus, as higher oil revenue and various funding initiatives have raised the government’s ability to execute on capital spending plans.
The agency was however concerned the FX market remains far from fully transparent, with domestic liquidity also becoming a constraint, while growth forecast is subject to downside risks. Inflation remains high at 16.1 per cent in July 2017, but could decline to 11 per cent in 2019. Crude oil production rose to 1.8 million barrels per day (mbpd) in July 2017, from 1.5mbpd in December 2016, a development driven by the lifting of force majeure at the Forcados export terminal and the completion of maintenance at both Forcados and the Bonga oil field.
Fitch also revised down its expectation of full-year average production to 1.8 mbpd, which is about equal to 2016 production and noted that the imposition of an OPEC quota may cap Nigeria’s crude production at 1.8mbpd, which could limit the oil sector’s upside potential. However, since it excludes condensate production, the quota should not affect Nigeria’s near-term production potential.
The Central Bank of Nigeria (CBN) in April, 2017 introduced the Investors & Exporters (I&E) currency window and gradually introduced further measures to improve the liquidity of the foreign exchange market. It has also been intervening actively to support the currency while keeping domestic liquidity conditions tight.
In addition, higher oil prices and increased portfolio and FDI inflows have enabled the CBN to increase its provision of FX liquidity to the market. As a result, the parallel exchange rate began to converge towards the I&E rate, currently at around NGN360 per USD, and foreign currency liquidity shortages eased. Most activity now occurs on the I&E window, and it believes that the I&E rate should now be considered the relevant exchange rate.
Fitch forecasts Federal Government fiscal deficit to rise slightly to 4.5 per cent of GDP in 2017 from 4.4 per cent in 2016. Tax revenue in the first five months of 2017 under-performed budget expectations, as in 2015-16. The current Medium Term Expenditure Framework (MTEF) envisages a combined NGN3.5 trillion of capital expenditures in 2017 and 2018.
In 2016, with a budget year that ran to May 2017 the government executed approximately N1.2 trillion of the N1.6 trillion forecast in the 2016 budget. Improved financing will see a stronger execution of capital expenditure plans in 2017 and subsequent years. As oil production rises and the overall economy recovers, Fitch expects that higher revenues will drive a narrowing of the general government deficit to 3.4 per cent in 2018. Nigeria’s general government debt stock is low at 17 per cent of GDP at end-2016, well below the ‘B’ median of 56 per cent of GDP, and Fitch expects only a moderate increase to 20 per cent of GDP at end-2017.
However, low revenues present a risk to public debt sustainability. General government debt to revenue, at 297 per cent at end-2016, is already above the ‘B’ category median of 227 per cent and Fitch forecasts it to increase to 325 per cent in 2017. The ratio is even higher at the Federal Government level. Nigeria’s current account surplus is expected to widen slightly to 1 per cent of GDP in 2017, from 0.7 per cent in 2016 even as the agency expects exports to increase by about 30 per cent in 2017 and an additional 10 per cent in 2018, as oil production and prices improve.
However, imports, which fell by over 30 per cent in 2016, will also rise as dollar availability increases and the non-oil economy recovers. The international reserves position has increased to $30.8 billion as of end-July 2017 and it will be bolstered by expected external financing flows. There were also worries that part of the reserves may be encumbered in forward contracts.
Meanwhile, the economic contraction in 2016 and tight FX and naira liquidity weakened asset quality in the Nigerian banking sector. Non-performing loans rose to 12.8 per cent at end-2016, up from 5.3 per cent at end-2015. Rising impairment charges from bad loans have in turn led to capital adequacy ratios falling to 14.8 per cent in 2016, from 16.1 per cent at end-2015. Fitch argued that the new FX window has aided FX liquidity for banks in 2017.
while credit to the private sector (adjusted for FX valuation effects) is declining.