S&P’s ratings affirmation signals policy on right path despite negative outlook
Ratings agency Standard & Poor’s on Friday revised Nigeria’s sovereign credit outlook down to negative from stable. The bigger story is that it still re-affirmed the country’s ratings at B+, a signal that the Governments policy response to slumping oil prices is on the right path, writes PATRICK ATUANYA…
Ratings agency Standard and Poor’s (S & P) on Friday 18th March, 2016, revised its outlook to negative from stable on the Federal Republic of Nigeria.
S & P however affirmed its ‘B+/B’ long- and short-term foreign and local currency sovereign credit ratings on Nigeria.
At the same time, it also affirmed the long-term national scale rating on Nigeria at ‘ngA’ and short-term national scale rating at ‘ngA-1’.
Ratings and subsequent reviews issued by agencies such as S & P are a guide for investors on the credit worthiness of a sovereign (that intends to issue new debt) and the possibility of default on previously issued debt especially if a significant macro event has occurred that could negatively affect the sovereign.
In the case of Nigeria the major trigger for S & Ps negative outlook in its ratings review is the exposure of the country’s fiscal balance sheet and economy to slumping oil prices which are down some 60 percent from the 2014 peak.
According to the ratings agency:
“The outlook revision reflects the negative effects on Nigeria’s economy of the continued fall in oil prices since our last review…in September 2015; we have since revised down our oil price assumptions for 2016-2019 by about US$20 per barrel.”
S & P however explains the affirmation of the ratings thus:
“The ratings are supported by relatively low general government and external debt burdens, significant oil production and ample oil reserves, and recent positive measures toward tackling corruption and developing the non-oil sector. Nigeria relies on oil and gas for over 90% of its exports, at least half of fiscal revenues, but only about 10% of GDP.”
Nigeria’s low debt levels, movement on reforms and oils low contribution to GDP is significant and positive when the country is compared to other major oil producing peers currently being negatively affected by slumping oil prices.
In February this year, five oil producing countries were hit with downgrades from Standard and Poor’s.
The agency slashed debt ratings of Saudi Arabia, Oman, Bahrain, Brazil and Kazakhstan, citing the collapse in crude prices from well over $100 per barrel to $30 as the main reason.
Colombia, another major oil producer, had its credit outlook cut to negative.
Saudi Arabia had its rating slashed two notches by S&P as oil accounts for 75 percent of the kingdom’s revenue while tumbling prices have created a huge hole in its budget.
Nigeria’s policy reforms to lay growth foundation
Standard and Poor’s in its ratings review said Nigeria’s medium-term prospects could be assisted by a rebound in the oil price as well as government reforms across the economy, including the establishment of a treasury single account, improvements in the power sector, reforms to the Nigerian National Petroleum Company, and reforms to increase non-oil fiscal revenues and cut fiscal expenditures.
Nigeria’s economy saw considerable slowdown in growth in 2015 compared to 2014 with the major culprit being the slumping oil price, uncertainty surrounding elections, weak consumer spending and falling revenues for the three tiers of government that also cut capital spending on infrastructure such as roads and bridges.
Growth that averaged 6.5 percent per annum in the decade to the year 2014, will come in at slightly less than half that level at 3.1 percent in 2015 according to International Monetary Fund (IMF) estimates.
According to Standard and Poor’s Nigeria in 2016 may however escape downgrade due to:
“The restoration of some confidence in the non-oil sector and the gradual trickle through of infrastructure spending, we expect a pickup in real GDP growth to 3.4% in 2016, with an average of 4.1% over 2016-2019. We expect the oil price burdens to abate as oil prices gradually rise to $50/bbl in 2018 and the non-oil economy rebounds.”
A new Nigerian Government headed by President Muhammadu Buhari elected last year with a mandate to end corruption and foster inclusive growth is moving ahead with major reforms in the economy.
“We believe these anti-corruption and efficiency measures could bear fruit in the medium term. President Buhari has replaced several senior functionaries, including the board and the head of the state-owned Nigerian National Petroleum Corporation (NNPC),” S & P said, in a statement following the review.
The Finance Minister Kemi Adeosun recently laid out the government’s vision for achieving this mandate in a series of articles.
The major thrust of the economic vision is to plug loopholes and efficiently target spending on capital projects to give a Keynesian or countercyclical lift to the economy.
“We can transition from being a commodity economy to an industrialised, regionally dominant one. Oil is important but clearly, oil it not enough,” Adeosun said.
The Nigerian economy is already well diversified with services making up 52 percent of the economy and major non oil sectors including Agriculture, Entertainment and arts and ICT all growing fast.
However there are major gaps as 0il’s outsized impact on the economy can be seen with proceeds from its export making up 70 percent of Government revenues and 95 percent of dollar earnings, despite making up only 10 percent of GDP.
According to the Finance Minister the provision of a spending stimulus to the economy is critical to releasing the upside in the economy, and the government shall be investing specifically in Power and Transportation which will release the opportunities in solid minerals, manufacturing and agriculture.
The plan by the Ministry of Finance (MOF) to focus on increasing the revenue collection by the Government is a step in the right direction.
“The 2016 budget is deficit financed; and the fiscal housekeeping which is aggressively blocking revenue leakages and reducing costs is firmly aimed at ensuring that the borrowed funds are channeled into capital projects, rather than seeping through an inefficient financial management system,” Adeosun said.
Reforms such as the Treasury Single Account (TSA), BVN, and the establishment of an efficiency unit should help the government better monitor and execute the spending by all levels of government and agencies, and generate some fiscal savings by the end of the year.
The closing of leakages in customs and tax reform by the Federal Inland Revenue Service (FIRS) to broaden the non-oil tax base will also enable the sovereign to rebuild fiscal buffers, especially as oil prices begin to slowly climb in coming months.
The federal government and the FIRS have pledged to work with state revenue authorities to contain expenditures and raise states’ internally generated revenues, which is a major concern for S & P.
There is also the adoption of zero-based budgeting (whereby government departments have to present requests for all allocated government funds, instead of only incremental transfers), which has the potential to improve the efficiency of spending allocations.
On Terror group Boko Haram Standard & Poor’s says:
“President Buhari has intensified military efforts as well as engaging with regional leaders in Chad, Niger, and Cameroon, to enhance joint initiatives to tackle Boko Haram. So far, his campaign has been broadly successful.”
Could Standard & Poor’s be behind the curve?
According to Standard & Poor’s the negative outlook for Nigeria signals that there is at least a one-in-three probability that it will lower its rating on Nigeria in the next 12 months.
“Deterioration of Nigeria’s fiscal or external accounts, or greater stress in the financial sector than we currently expect, could lead to a downgrade,” S & P said.
On the other hand the rating agency notes that, it could revise the outlook to stable if adjustments to the country’s foreign exchange policy settings eased the dislocations in product and financial markets, or if external factors improve considerably (for example, due to a sizable rebound in the oil price).
Ratings are by their very nature usually backwards looking, and while the Nigerian government is not waiting to be bailed out by a rebound in oil prices, any positive surprise, combined with the reforms being enacted will give tremendous upside for Nigeria especially with regards to fiscal buffers.
PATRICK ATUANYA