Dipo Olowookere
**Says Inflation to Remain at Double Digits through 2019
**Debt to Hits 292% of Revenue
**Buhari Expected to Continue Economic Programme if Re-elected
By Dipo Olowookere
The outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) has been reviewed upward to stable nearly six months after it was dropped to negative by Fitch Ratings.
In a statement dated November 2, 2018, the global rating agency said it also affirmed its rating on Nigeria at ‘B+’.
According to Fitch, the revision of the outlook on Nigeria’s Long-Term IDRs reflects the ongoing economic recovery and decreasing external vulnerabilities, both supported by increased oil production and higher global oil prices.
It noted that despite setbacks, the Nigerian economy is continuing its slow recovery from the recession that ended in early 2017.
Fitch pointed out that non-oil growth has been supported by an increase in the supply of foreign exchange and will receive an additional boost as the government begins its delayed implementation of the 2018 capital budget.
“Political uncertainty ahead of the general election scheduled for February 2019 may lead to some weakening in growth, but we expect any disruption to be short-lived,” the statement obtained by Business Post said.
It added that the contribution of the oil sector has been positive in the first half of 2018 as oil production, including condensates, has averaged just below 2.1 million barrels per day (mbpd), compared with 1.9 mbpd in 2017.
Fitch said it expects average production of crude oil in Nigeria to remain around 2.1 mbpd through 2018 and 1H19.
Fitch is forecasting a GDP growth of 2 percent overall in 2018, increasing to 2.5 percent in 2019 and 3.3 percent in 2020, and the agency expects that Nigeria’s medium-term growth will average around 4 percent.
It noted that oil production will increase as new exploration and oil infrastructure projects begin to come online, but emphasised that Nigeria will struggle to raise production to the levels envisaged in the 2019-2021 Medium Term Expenditure Framework (MTEF).
Fitch said high inflation has been a rating weakness, but CPI growth slowed to 11.3 percent year-on-year in September 2018, down from a recent peak of 18.7 percent in January 2017.
Inflation fell rapidly in 1Q18, but disinflation has slowed since, as base effects fade and conflicts between herders and farmers affect food supplies.
Fitch said it expects that annual average inflation will fall, but remain in the double digits through 2019.
“Despite falling inflation, Fitch expects that the Central Bank of Nigeria (CBN) will move towards tighter monetary policy to support FX rate stability,” the firm said.
The CBN has kept the monetary policy rate at 14 percent since May 2016, but has conducted monetary policy through its sales of Open Market Operation bills and by managing the reserve ratio.
Foreign currency availability has improved although Fitch believes that it remains a constraint on economic growth. The CBN continues to operate an FX regime with multiple windows and exchange rates, which will not change before the general elections. However, the wholesale interbank FX rate has depreciated, bringing it closer to the rate at the Investors and Exporters window.
Nigeria has increased its stock of international reserves to $44.6 billion (7.2 months of current external payments) as of September 2018, from $37.9 billion at end-2017.
The accumulation of reserves has been a function of both an increase in oil export receipts and an increase in inflow of foreign investments.
The rating agency said Nigeria’s external flows are exposed to global risk sentiments as well as to investor’s views on the country’s political and fiscal developments. However, the build-up of reserves provides a substantial external buffer.
“Nigeria’s ‘B+’ IDRs also reflect the country’s position as Africa’s largest economy and its well-developed domestic debt markets, balanced against low levels of domestic revenue mobilisation and of GDP per capita, a high level of hydrocarbon dependence, and low rankings on governance and business environment indicators.
“Nigeria continues to run persistent fiscal deficits at both the central and general government levels. Fitch forecasts a general government deficit of 4.3 percent of GDP in 2018, approximately the same as 2017.
“The government’s 2019-2022 Medium Term Expenditure Framework envisages a decrease in expenditure following three straight years of increasing capital expenditure. Lower expenditure, as a percentage of GDP, will help the general government fiscal deficit to narrow to 4 percent of GDP in 2019, but the government will continue to experience difficulty in raising non-oil domestic revenue.
“Oil revenue has increased since hitting bottom in 2016, but volatile production levels and inefficiencies within the petroleum sector have limited the transmission of higher oil prices to higher government revenue,” the statement said.
It added that Nigeria’s general government debt will rise to 292 percent of revenue, well above the historical ‘B’ median of 205 percent of revenue, reflecting the accumulation of new debt and the lack of progress on raising government revenue.
At 20 percent of general government revenue, interest payments are already more than twice the ‘B’ median. Federal government interest expenditure to federal government revenue stands much higher at just below 60 percent, the company stated.
“Fitch forecasts Nigeria’s current account (CA) surplus to widen to 3.6 percent of GDP in 2018 as oil export receipts have grown thanks to high oil prices. The CA surplus will narrow in subsequent years as import growth increases following several years of import compression related to tight foreign exchange supply. Nigeria is a net external creditor equivalent to 12 percent of GDP in 2018.
Fitch considers that the easing of foreign-currency liquidity has reduced risks regarding Nigerian banks’ ability to meet dollar liabilities and external debt repayments. However, economic headwinds have continued to affect asset quality.
“Average industry NPLs (according to CBN data) increased to 15 percent at end-2017, reflecting the lag affect from 2015. NPLs are concentrated in the oil and gas sector. The ongoing economic recovery, higher oil prices and widespread loan restructuring is likely to moderately help asset quality, but high NPLs will weigh on private sector credit provision.
“Credit to the private sector returned to modest positive growth in 2018 after tight domestic liquidity and crowding out from government borrowing led to a contraction of 5 percent through November 2017,” the firm said.
It was stressed that the outcome of the upcoming general elections remains uncertain. President Buhari will face a strong challenge from former Vice President Atiku Abubakar, who won the October 2018 primary to be the People’s Democratic Party candidate. Abubakar has made limited statements regarding his economic policy platform, but has criticised the current FX regime and has also signalled his support for devolving more control over public finances to the state governments.
“If Buhari is re-elected, we expect his government to continue implementing the economic programme outlined in the Economic Recovery and Growth Plan released in March 2017.
“Fitch does not expect widespread disruption or instability around the election. However, a flare-up of violence in the Niger Delta around the elections presents downside risk to the fiscal, external and GDP growth forecasts,” the rating agency stated.
