Nigeria 'B/B' And 'ngA/ngA-1' Ratings Affirmed; Outlook Stable

  • Nigeria's economic performance remains weak and its external debt moderate. We consider fiscal consolidation will be key in the period ahead. President Buhari has secured a second term, which provides his government with another opportunity to strengthen economic policy framework and consolidate public finances.
  • We are therefore affirming our 'B/B' sovereign credit ratings and 'ngA/ngA-1' Nigeria national scale ratings on Nigeria.
  • The outlook is stable.
RATING ACTION
On March 15, 2019, S&P Global Ratings affirmed its 'B/B' long- and short-term 
sovereign credit ratings on Nigeria. The outlook is stable. At the same time, 
we affirmed our long- and short-term Nigeria national scale ratings at 
'ngA/ngA-1'.

OUTLOOK
The stable outlook balances the risks associated with Nigeria's still-weak 
economy against its moderate external debt and external buffers.

We may lower the ratings if Nigeria's international reserves were to decline 
markedly and at the same time its external debt rose much faster than we 
currently expect.

We could raise our ratings if Nigeria's economic performance were to improve 
markedly more than our base case--for example, if it saw positive real per 
capita growth, or it consolidated its fiscal deficits more quickly.

RATIONALE
The ratings on Nigeria are supported by its relatively low general government 
debt stock, the country's moderate external indebtedness, and its moderate 
international reserves. 

The ratings remain constrained, in our view, by the country's low economic 
wealth, weak institutional capacity, and lower real GDP per capita trend 
growth rates than peers at similar development levels. 

Institutional and Economic Profile: Weak economic performance, with slower 
trend growth than peers
  • By securing a second term as leader of Nigeria, Mr. Buhari has gained another opportunity for his government to improve the economy and stabilize public finances.
  • The economy is growing more slowly than that of peers that have similar wealth levels.
Nigeria has a democratic political system and has tested its ability to 
transfer power between different political parties. However, we regard its 
institutions as weak and policy predictability as low. Fiscal budgets are 
frequently passed well after the year has begun, which impedes the 
government's responsiveness to economic challenges. 

Decision-making at the federal level has largely been centralized in the 
office of President Buhari, although we consider that his government's federal 
system does help to redistribute wealth and spread power, to some extent. 
Security risks from Boko Haram in the northeast have abated slightly, compared 
with the past three years, but there are still sporadic attacks on oil 
pipelines in the Niger delta. 

In the general elections held on Feb. 23, 2019, Mr. Buhari won a second term 
with 56% of the votes. His nearest challenger, Mr. Atiku Abubakar, garnered 
41% of the votes and is contesting the election outcome in courts. State and 
local elections were held on March 9 and the final results are still being 
collated. Our base case is that Mr. Buhari and the APC coalition he has so far 
led will form a new government within the next few weeks, and that the policy 
framework will not change significantly. The result of the presidential 
elections provides Mr. Buhari's government with another opportunity to 
strengthen the economic policy framework and consolidate public finances. 
Nigeria's economic performance has been weak--GDP per capita has been negative 
and debt-servicing costs absorb at least 30% of the country's fiscal revenues, 
which constrains its fiscal flexibility. 

Nigeria is a sizable producer of hydrocarbons. The oil sector's direct share 
of nominal GDP is officially estimated at about 10%, but oil and gas account 
for over 90% of exports and at least half of fiscal revenues. Economic data 
released by Nigeria's National Bureau of Statistics show that Nigeria's 
economy grew by 1.9% during 2018, based on improving performance in non-oil 
sectors as well as rising oil prices. 

Agriculture, manufacturing, and services (which comprise the transport, 
information, communication, and technology sectors) have helped the economy 
grow faster in 2018 than the 1% it achieved in 2017. In our view, the increase 
in the availability of foreign currency and the flexible exchange rate have 
helped the non-oil sector grow. 

That said, average oil production is close to 2 million barrels per day and we 
forecast that oil prices will decline over 2019 and 2020 (see "S&P Global 
Ratings Lowers Brent And WTI Oil Price Assumptions For 2019 Through 2020; 
Natural Gas Price Assumptions Are Unchanged," published on Jan. 3, 2019). Low 
oil prices are likely to present fiscal pressures and limit growth, 
stimulating government expenditure. 

In the medium term, we expect improvements in the non-oil sector to support 
our forecast of economic growth rising to at least 2% in real terms. However, 
when we use 10-year weighted-average growth rates to estimate real per capita 
GDP growth, we calculate that the real economy is shrinking by 0.7% a year, 
well below the economic performance of peers that have similar wealth levels. 
Nigeria has significant infrastructure shortfalls and low income levels, with 
GDP per capita estimated at US$1,800 in 2018.

Flexibility and Performance Profile: The post-election period provides an 
opportunity for the government to pursue fiscal consolidation 

  • Net external debt is likely to increase over 2019-2022 if fiscal financing remains externally funded and external buffers stay at current levels.
  • After the elections, Nigeria could consolidate its fiscal position if it increases non-oil revenues while moderating capital spending.
Although oil revenues support the economy when prices are high, they expose 
Nigeria to significant volatility in terms of trade and government revenues. 
Consequently, Nigeria's trade balance is significantly affected by changes in 
the price of oil. Nigeria also consistently runs substantial deficits on the 
service and income balances. 

The most consistently supportive feature of Nigeria's current account is the 
surplus on net transfers, largely based on diaspora remittances by Nigerians 
living abroad. In 2018, oil prices increased by close to 30%, boosting 
Nigeria's export revenues. However, imports of goods and services surged at 
the same time. We estimate that the current account surplus in 2018 may be 
only 2% of GDP; in 2017, when oil prices were lower and imports were 
compressed, it reached 3% of GDP. 

Over 2019-2022, we assume that oil prices will decline, which will reduce 
export revenues. We also expect imports to moderate, albeit more slowly. Our 
overall forecast of the current account is a near balance, averaging -0.4% 
over 2019-2022. We now estimate gross external financing needs will average 
close to 100% of current account receipts (CARs) plus usable reserves during 
2019-2022. 

The government is likely to cover its external financing needs through a 
combination of concessional credit lines and the international capital 
markets. As part of exchanging expensive domestic debt for cheaper foreign 
currency debt and general external financing needs, the government last year 
issued Eurobonds worth about $6 billion. The impact of rising net external 
debt in 2018 was moderated by improving foreign exchange reserves at the 
Central Bank of Nigeria (CBN). 

In 2019, we expect Nigeria's government to issue further Eurobonds before 
moderating issuance levels in 2020-2022. We assume central bank reserves will 
remain at the current levels. The government drew down some of its savings in 
2018 from the excess crude account (ECA). It was above US$2 billion at the 
start of 2018, and is now estimated to be close to US$1 billion. 

We add government savings from the ECA plus the Nigeria sovereign wealth fund 
(which stands at about US$2 billion in 2019) to calculate public sector liquid 
external assets. We expect a reduction in external assets, combined with 
rising external indebtedness, to weaken Nigeria's net external position. 
Therefore, we estimate narrow net external debt (external debt minus liquid 
external assets) will likely rise from an average of about 30% of CARs in 2018 
to 45% over 2019-2022. 

Although Nigeria produces an international investment position (external asset 
and liability position), our analysis of Nigeria's external accounts is 
hampered by discrepancies in the data that average 20% of CARs. The 
discrepancies occur between changes in the external stocks and changes in the 
balance of payments.

Higher oil prices in 2018 have helped increase government revenue, largely 
offsetting weak non-oil revenue growth. However, projects requiring capital 
expenditure have been implemented more quickly and deficits remain at the 
state and local government levels. As a result, we project the general 
government deficit (which combines deficits at the federal, state, and local 
government levels) will remain above 3% of GDP this year. 

Our forecast shows oil prices declining and capital expenditure moderating 
after the election cycle. At the same time, a pick-up in non-oil economic 
activity should help grow non-oil revenues. These factors should help Nigeria 
consolidate its fiscal positon, as headline deficits decline closer to 2% of 
GDP by 2022. We estimate the annual change in net general government debt will 
average 2.65% of GDP in 2019-2022. 

In projecting the overall general government deficit, we exclude the clearance 
of fiscal arrears to contractors, suppliers, and lower levels of government 
that have yet to be reconciled. Fiscal arrears are estimated at 2%-3% of GDP. 
A plan to clear them by issuing debt securities denominated in Nigerian naira 
(NGN) in 2019 has been proposed--if the national assembly approves the plan, 
our deficit and debt projections could increase by the same margin.

Overall, we forecast that Nigeria's gross general government debt stock 
(consolidating debt at the federal, state, and local government levels) will 
average 26% of GDP for 2019-2022, which compares favorably with peer 
countries' ratios. We also anticipate that general government debt, net of 
liquid assets, will average close to 20% of GDP in 2019-2022. 

The government created the Asset Management Corporation of Nigeria to resolve 
the nonperforming loan assets of Nigerian banks. We include its debt, which 
comprised about 3% of GDP in 2019, in our calculations of gross and net debt. 
Over 70% of government debt is denominated in naira, which limits exchange 
rate risk.

Despite the relatively low amount of government debt, the cost of servicing it 
is relatively high, as a percentage of revenue, because of the high coupon on 
local currency treasury bills and bonds. In our view, the high debt-servicing 
costs--projected to remain over 40% of revenue at the central government 
level--limit fiscal flexibility. 

We project average debt-servicing costs for 2019-2022 of 30% of general 
government revenues. This represents a steep increase from just 10% in 2014. 
Not only are oil revenues lower than they were in 2014, borrowing costs in the 
domestic market have also risen. To reduce its borrowing costs, the government 
has borrowed externally to fund maturing short-term domestic debt obligations.

We assess the exchange rate regime as a managed float. The CBN currently 
operates multiple exchange rate windows. The main exchange rate windows are 
the official CBN rate for government transactions, CBN window for banks and 
manufacturing companies, and the Nigerian Autonomous Foreign Exchange Fixing 
Mechanism (Nafex) window for all other autonomous transactions. Apart from the 
official rate, all other rates have converged to the Nafex window, averaging 
NGN362 to US$1 in 2018. We do not expect any policy decision to merge the 
various exchange rate windows.  

Inflation is declining in Nigeria, although it remains high. It averaged 12% 
in 2018, down from 16.5% in 2017. We anticipate that it will fall further to 
10% in 2019, and average around 9% over the medium term. Good performance in 
agriculture has helped by increasing crop outputs and the food supply. Lower 
food prices, combined with lower oil prices and a stable exchange rate, has 
kept import costs stable and relatively low. 

The banking sector has been operating under difficult economic and regulatory 
circumstances. We still consider the Nigerian banking sector to be in a 
correction phase. It suffered high credit losses of 2.5%-3% over the past two 
years and we expect flat or negative credit growth in 2019-2020. That said, 
the banking sector has stabilized since the 2016 oil price shock--we think 
material change unlikely in the next 12-24 months. We also expect 
profitability at the top-tier banks to remain resilient to the credit cycle. 
In 2018, Nigerian banks implemented International Financial Reporting 
Standards (IFRS) 9 using their regulatory risk reserves, thus shielding their 
capital ratios from breaching the minimum capital requirements.