- Increased oil production, rising oil prices, modest improvements in exchange rate policy, and federal government external commercial borrowings helped to increase foreign currency inflows into the Nigerian economy in 2017.
- However, Nigeria's fiscal consolidation remains slow, while economic growth is improving at a slower pace than we previously envisaged.
- We are therefore affirming our 'B/B' ratings on Nigeria.
- The outlook is stable.
On March 16, 2018, 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 'ngBBB/ngA-2'.
The stable outlook signals our assessment that non-oil-sector improvements could support higher economic growth and fiscal revenues over the next 12 months. We may lower the ratings if we don't see the significant fall in fiscal deficits that we expect in our base case. We could raise our ratings on Nigeria if we see much higher economic growth prospects than our base case or if Nigeria's external liquidity indicator improves, perhaps due to further accumulation of international reserves alongside an extension of external debt maturities.
The ratings on Nigeria are supported by moderate external indebtedness and a relatively low general government debt stock. However, debt-servicing costs are high. The ratings remain constrained by our view of the country's low economic wealth, weak institutional capacity, lower real GDP per capita trend growth rates than peers at similar development levels, and low monetary policy credibility.
Institutional and Economic Profile: Economic performance is still weak, with trend growth below peers
- Nigeria's current pace of economic growth remains low relative to peers with similar wealth levels.
- Political decision-making in Nigeria can be unpredictable, since government institutions are relatively weak.
- Despite underlying tensions and complexities, Nigeria is a democratic system that has weathered a transfer of power between different political parties.
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. In 2017, Nigeria emerged from recession. The economy grew, in real terms, by 0.8% in 2017, compared with a 1.6% contraction in 2016. The recovery is being driven by improving oil prices, increasing foreign currency inflows, and strong agricultural sector performance. Oil production also stabilized at about 1.9 million-2.1 million barrels per day, after disruptions in early 2017. In the near term, we estimate that the economy will grow at 2.4% of GDP in 2018 (compared with our previous forecast of 3%) and will average 2.8% in 2018-2021. Excluding agriculture, the non-oil economy has yet to fully respond to the improving conditions, with modest growth of less than 1% in 2017. Thus, we expect non-oil-sector improvements will support our forecasts for higher economic growth. However, real per capita GDP growth of negative 0.19% (which we estimate by using 10-year weighted-average growth) remains well below that of peers with similar wealth levels. Nigeria has significant infrastructure and energy shortfalls and low income levels, with GDP per capita estimated at US$1,800 in 2018. We observe that Nigeria is taking steps to improve its governance and strengthen the business environment. The latest World Bank Ease of Doing Business Indicators show Nigeria improving 24 places to No. 145 of 190 countries. In our view, political decision-making in Nigeria can be unpredictable. We view government institutions as relatively weak, with slow decision-making on policy issues. Fiscal budgets are frequently passed well after the year has begun, which delays the government's responsiveness to economic challenges. We also view decision-making as largely centralized in the person of the president, although we note that the federal system of government helps to redistribute wealth and spread power to some extent. Nigeria has a democratic system with a tested transfer of power between different political parties, last witnessed at the 2015 general elections. The next presidential elections are due in 2019. The presidential candidates are not clear at this stage but the dominant parties will remain the ruling coalition of the All Progressives Congress and the opposition People's Democratic Party. While security risks have slightly abated compared with the last two years, we still see sporadic attacks in the North East owing to Boko Haram.
Flexibility and Performance Profile: An improved external position and low general government debt is juxtaposed against sizable fiscal deficits and high debt-servicing costs
- Nigeria's external position has improved, owing to higher oil prices and production volumes, modest improvements in exchange rate policy, and federal government external commercial borrowings that are helping to increase foreign currency inflows and have allowed the central bank to build external buffers.
- Nigeria still operates multiple exchange rates, which we consider a managed float with a short track record, while foreign exchange restrictions on some key items remain for an extended period.
- The country has a relatively low level of general government debt but high debt-servicing costs.
Although oil revenues support the economy when prices are high, we view them as exposing Nigeria to significant volatility, in terms of trade and government revenues. Rising oil prices, a relatively new market-determined exchange rate window introduced in April 2017, and government external borrowings are helping to increase foreign currency inflows into the economy, allowing the central bank to increase foreign-exchange reserve buffers. We estimate that the current account surplus increased further to 2% of GDP in 2017 compared with 1% in 2016 and an average of 1.6% of GDP in 2018-2021. The recovery in oil prices and production have helped strengthen the trade balance. In January 2018, we revised our oil price assumptions (see "S&P Global Ratings Raises 2018 Brent And WTI Oil Price Assumptions," published Jan. 18, 2018, on RatingsDirect). Higher oil prices in 2018 could support a further current account surplus strengthening closer to 3% of GDP for 2018. We assume a lower oil price in 2019, however, and gradually rising imports along with foreign currency supply, which leads us to expect only limited current account strengthening over 2019-2021. The central bank has been able to increase its external buffers to close to seven months import cover compared with five months cover three years ago. Improving current account balances and external buffers have led us to forecast lower ratios of narrow net external debt to current account receipts (CARs) and of gross external financing needs to CARs plus usable reserves. We now estimate gross external financing needs will average close to 100% of CARs plus usable reserves during 2018-2021. We expect the government's external financing needs to be covered by a combination of credit lines from multilateral partners, and from the international capital markets. The government has been able to issue eurobonds to the value of US$5.5 billion in the past six months. We now estimate narrow net external debt (external debt minus liquid external assets) will only increase to 36% of CARs in 2021 from 26% this year. We have revised our 2017 general-government fiscal deficit estimate to above 5% of GDP relative to our 3.5% of GDP assumption in September 2017, based on preliminary outturn. We now estimate the annual change in net general government debt will average 3.6% of GDP in 2018-2021, compared with 3% of GDP previously. The weaker expectations are based on slower non oil revenue growth compared with budget, transfers by federal government to the lower levels of government remaining at a high level, a faster implementation of capital budget spending, and overall still relatively high deficits of states and local governments. Despite rising oil related revenues, fiscal adjustment challenges remain in 2018. The states and local governments are still receiving substantial transfers and running deficits that we estimate will remain at around 1% of GDP until 2019. Our overall general government deficit projections exclude the clearance of fiscal arrears to contractors, suppliers, and lower levels of government. If a proposed plan to clear fiscal arrears, estimated between 2% and 3% of GDP, is approved by the national assembly in 2018, through the issuance of naira-denominated debt securities, it could increase our deficit and debt projections 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 27% of GDP for 2018-2021, comparing favorably with peer countries' ratios. We also anticipate that general government debt, net of liquid assets, will average 18% of GDP in 2018-2021. We include debt of the Asset Management Corporation of Nigeria (AMCON; around 5% of 2018 GDP)--created to resolve the nonperforming loan (NPL) assets of the Nigerian banks--in our calculation of gross and net debt. Over 70% of government debt is denominated in naira. Despite the relatively low government debt stock, general government debt-servicing costs as a percentage of revenues are high and have increased in recent years from below 10% in 2014 to our projection of over 20%, on average, in 2018-2021. The central government alone has debt servicing costs of close to 50% of revenues, which in our opinion limits fiscal flexibility. The steep increase in the ratio is due to a combination declining oil revenues since 2014 and higher borrowing costs in the domestic market. The government has borrowed externally to fund maturing short-term domestic debt obligations, which are costly, as a way to reduce borrowing costs. In April 2017, the Central Bank of Nigeria (CBN) introduced a new exchange rate window, the Nigerian Autonomous Foreign Exchange Fixing Mechanism (Nafex), commonly known as the New Investors and Exporters Foreign Exchange Window. The new window adds to the interbank market, and the two have become the main exchange rate windows utilized in foreign currency trading. The interbank market window trades at around $1 to NGN326-NGN345, while the new foreign investors exchange window trades at $1 to NGN360. However, Nigeria still maintains foreign exchange restrictions on some current and capital transactions, including import restrictions on 41 categories of goods. Following years of heightened risks, operating conditions for the Nigerian banking sector are improving due to the gradual economic recovery, rising oil prices, increasing U.S. dollar supply in the banking system, and Nigeria's successful tapping of the Eurobond market. The majority of banks have overcome their short-term liquidity challenges. We expect muted loan growth as well as gradual improvements in asset quality and profitability, with top tier banks faring better than the sector average. Capital adequacy remains exposed to unexpected weakening of the naira and weak internal capital generation because of the potential provisioning shortfalls and pressure on net interest margins on the back of the federal government conversion of part of its short-term debt into longer dated U.S. dollar-denominated debt. We understand that banks have received guidance to report their year-end 2017 results with a naira exchange rate at about $1 to NGN330. In addition, the CBN has restricted banks from distributing dividends if their NPLs ratio exceeds the 5% regulatory limit. We may see some banks convert their banking license to a national one to meet the lower minimum capital adequacy ratio. The introduction of the 1% additional buffer has been suspended for now to avoid putting further pressure on banks. Inflation remains high. In December 2017, annual consumer price inflation accelerated to 16.5% compared with 15.7% in December 2016. The rising trend has been attributed to the June 2016 devaluation and structural factors such as increases in the cost of food, electricity, transport, and inputs, as well as low industrial activity. Inflation started falling in late 2017 and the trend is likely to continue in 2018. In February 2018, inflation was recorded at 14.3% suggesting a downward trend in line with our base case. Consequently, we expect that inflation for 2018 will move to 12% and slowly fall toward single digits through 2021.
|Nigeria Selected Indicators|
|ECONOMIC INDICATORS (%)|
|Nominal GDP (bil. LC)||72,600||81,010||90,137||95,178||102,575||114,907||125,901||136,162||150,064||166,777|
|Nominal GDP (bil. $)||461||515||542||480||389||343||349||381||426||480|
|GDP per capita (000s $)||2.8||3.0||3.1||2.6||2.1||1.8||1.8||1.9||2.1||2.3|
|Real GDP growth||4.3||5.4||6.3||2.7||(1.6)||0.8||2.4||3.0||3.0||3.0|
|Real GDP per capita growth||1.5||2.6||3.5||(0.0)||(4.2)||(1.8)||(0.3)||0.3||0.3||0.3|
|Real investment growth||2.6||7.9||13.4||(1.3)||(5.0)||(4)||(1.5)||(1.0)||4.0||4.5|
|Real exports growth||(3.6)||(21.7)||24.1||0.1||11.5||28.0||15.0||1.0||1.0||1.0|
|EXTERNAL INDICATORS (%)|
|Current account balance/GDP||4.1||3.9||0.2||(3.2)||0.7||1.7||2.8||1.4||1.2||1.1|
|Current account balance/CARs||15.8||16.6||1.2||(21.4)||4.5||8.8||12.4||6.7||6.6||6.1|
|Net portfolio equity inflow/GDP||1.8||0.6||(0.3)||(0.4)||0.0||0.1||0.1||0.1||0.1||0.1|
|Gross external financing needs/CARs plus usable reserves||78.6||77.7||95.1||123.7||118.8||114.7||102.5||106.9||108.0||109.6|
|Narrow net external debt/CARs||(23.7)||(11.9)||2.4||24.8||37.7||32.1||26.3||33.1||35.6||36.3|
|Narrow net external debt/CAPs||(28.1)||(14.2)||2.4||20.4||39.4||35.2||30.0||35.5||38.1||38.7|
|Net external liabilities/CARs||(3.8)||12.9||31.9||57.9||88.6||81.5||70.7||81.4||84.6||86.3|
|Net external liabilities/CAPs||(4.5)||15.5||32.3||47.7||92.8||89.4||80.6||87.3||90.6||91.9|
|Short-term external debt by remaining maturity/CARs||18.1||24.8||36.6||66.5||84.7||74.1||64.3||71.9||71.4||71.2|
|Usable reserves/CAPs (months)||4.3||5.7||5.2||5.1||6.5||5.8||6.6||7.0||6.8||6.5|
|Usable reserves (mil. $)||47,548||46,253||37,493||31,335||30,031||38,308||41,802||42,183||42,396||43,356|
|FISCAL INDICATORS (%, General government)|
|Change in net debt/GDP||5.2||2.9||(0.3)||0.2||3.0||5.8||4.0||3.5||2.5||2.3|
|MONETARY INDICATORS (%)|
|GDP deflator growth||9.3||5.9||4.7||2.9||9.5||11.1||7.0||5.0||7.0||7.9|
|Exchange rate, year-end (LC/$)||157.33||157.26||183.45||199.30||315.25||360.50||360.00||355.00||350.00||345.00|
|Banks' claims on resident non-gov't sector growth||6.6||16.7||27.0||2.1||20.9||(0.1)||8.0||12.0||15.0||15.0|
|Banks' claims on resident non-gov't sector/GDP||12.4||13.0||14.8||14.3||16.1||14.3||14.1||14.6||15.3||15.8|
|Foreign currency share of claims by banks on residents||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A||N/A|
|Foreign currency share of residents' bank deposits||20.8||24.7||25.9||21.9||24.9||23.0||23.0||23.0||23.0||23.0|
|Real effective exchange rate growth||(11.4)||(6.8)||(6.3)||1.9||13.5||N/A||N/A||N/A||N/A||N/A|
|Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.|
Ratings Score Snapshot
|Ratings Score Snapshot|
|Key rating factors|
|Fiscal assessment: flexibility and performance||5|
|Fiscal assessment: debt burden||4|
|S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.|
- Criteria - Governments - Sovereigns: Sovereign Rating Methodology, Dec. 18, 2017
- General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables, Aug. 14, 2017
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings , April 7, 2017
- General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
- General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
- Sovereign Ratings History – March 6, 2018
- Nigerian Banks' Troubled Past Continues To Cast A Shadow On A Brighter Future, January 30, 2018
- S&P Global Ratings Raises 2018 Brent And WTI Oil Price Assumptions, January 18, 2018
- Global Sovereign Rating Trends 2018 - January 10, 2018
- Sovereign Risk Indicators – December 14, 2017. An interactive version is also available at http://www.spratings.com/sri
- Banking Industry Country Risk Assessment: Nigeria - November 10, 2017
- Default, Transition, and Recovery: 2016 Annual Sovereign Default Study And Rating Transitions - April 3, 2017
- Credit Trends: 2016 Sovereign Ratings Update: Outlook And CreditWatch Resolutions – April 18, 2017
- Federal Republic of Nigeria Ratings Affirmed At 'B/B'; Outlook Stable - September 15, 2017
- Sovereign Debt 2017: Global Borrowing To Drop By 4% To US$6.8 Trillion – February 23, 2017
In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the analysts gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee's assessment of the key rating factors is reflected in the Ratings Score Snapshot above. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see 'Related Criteria and Research').
Ratings Affirmed Nigeria Sovereign Credit Rating Foreign and Local Currency B/Stable/B Nigeria National Scale ngBBB/--/ngA-2 Transfer & Convertibility Assessment B Nigeria Senior Unsecured Foreign currency B
- Primary credit analyst: Gardner Rusike, Associate Director
- Rating Committee Chairperson: Trevor Cullinan, Director
- Date initial rating assigned: Feb. 6, 2006
- Date of previous Review: Sept. 15, 2017
This rating has been determined by a rating committee based solely on the committee's independent evaluation of the credit risks and merits of the issuer or issue being rated in accordance with S&P Global Ratings' published criteria and no part of this rating was influenced by any other business activities of S&P Global Ratings. This credit rating is solicited. The rated entity did participate in the credit rating process. S&P Global Ratings did have access to the accounts, financial records and other relevant internal, non-public documents of the rated entity or a related third party. S&P Global Ratings has used information from sources believed to be reliable but does not guarantee the accuracy, adequacy, or completeness of any information used.
- Consumer price index: Index of prices of a representative set of consumer goods regularly bought by a typical household.
- Current account balance: Exports of goods and services minus imports of the same plus net factor income plus official and private net transfers.
- Current account receipts (CAR): Proceeds from exports of goods and services plus factor income earned by residents from nonresidents plus official and private transfers to residents from nonresidents.
- Date initial rating assigned: The date S&P Global Ratings assigned the long-term foreign currency issuer credit rating on the entity.
- Date of previous review: The date S&P Global Ratings last reviewed the credit rating on the entity.
- Debt burden assessment: Reflects a sovereign's prospective debt level, as indicated by the general government debt relative to GDP (including assessment of contingent liabilities), the interest cost of the debt relative to general government revenue, and debt structure and funding access.
- Economic assessment: Based on the analysis of economic structure and growth prospects. Reflects income levels (GDP per capita), economic growth prospects, and economic diversity and volatility.
- External assessment: Based on the analysis of external liquidity and international investment position as well as the status of a sovereign's currency in international transactions. Reflects a country's ability to obtain funds from abroad necessary to meet its public- and private-sector obligations to nonresidents.
- Fiscal performance and flexibility assessment: Reflects the sustainability of sovereign's fiscal deficits. Based on the prospective change in general government debt, calculated as a percentage of GDP, taking into account long-term trends and a government's fiscal flexibility and vulnerabilities.
- Foreign direct investment (FDI): Direct investment by nonresidents.
- GDP per capita: GDP divided by population.
- General government: Aggregate of the national, regional, and local government sectors, including social security and other defined benefit public-sector pension systems, and excluding intergovernmental transactions.
- General government debt: Debt incurred by national, regional, and local governments and central bank debt.
- General government interest: Interest payments on general government debt.
- General government liquid financial assets: General government deposits in financial institutions (unless the deposits are a source of support to the recipient institution), widely traded securities, plus minority arms-length holdings of incorporated enterprises that are widely traded plus balances of defined-benefit government-run pension plans or social security funds (or stabilization or other freely available funds) that are held in bank deposits, widely traded securities, or other liquid forms.
- Gross domestic product (GDP): Total market value of goods and services produced by resident factors of production.
- Gross external financing needs: Current account payments plus short-term external debt at the end of the prior year, including nonresident deposits at the end of the prior year plus long-term external debt maturing within the year.
- Institutional assessment: An analysis of how a government's institutions and policymaking affect a sovereign's credit fundamentals by delivering sustainable public finances, promoting balanced economic growth, and responding to economic or political shocks. Reflects the effectiveness, stability, and predictability of the sovereign's policymaking and political institutions; transparency and accountability of institutions, data, and processes; the sovereign's debt payment culture; and security risks.
- Monetary assessment: The extent to which a sovereign's monetary authority can fulfil its mandate while supporting sustainable economic growth and attenuating major economic or financial shocks. Based on the analysis of the sovereign's ability to coordinate monetary policy with fiscal and other economic policies to support sustainable economic growth; the credibility of monetary policy, and the effectiveness of market-oriented monetary mechanisms.
- Narrow net external debt: Stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid claims on nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities.
- Net general government debt: General government debt minus general government liquid financial assets.
- Net external liabilities: Total public- and private-sector liabilities to nonresidents minus total external assets.
- Official reserves: Monetary authority liquid claims in foreign currency (including gold) on nonresidents.
- Real GDP per capita: Constant-price per capita GDP.
- Trade balance: Exports of goods minus imports of goods.
- Usable reserves: Official reserves minus items not readily available for foreign exchange operations and repayment of external debt.
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
|Primary Credit Analyst:||Gardner G Rusike, Johannesburg (27) 11-214-4859;|
|Secondary Contact:||Ravi Bhatia, London (44) 20-7176-7113;|
|Research Contributor:||Shruti Ramakrishnan, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai|
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