Moody’s describes Nigeria’s peaceful transition as credit positive

Ratings agency Moody’s says Nigeria’s recent peaceful transition of power is credit positive, but admits that the country’s economic challenges still remain. Nigeria is rated Ba3 stable.

According to Moody’s Nigeria’s peaceful transition of power from the ruling People’s Democratic Party (PDP) government of Dr. Goodluck Jonathan to the All Progressives Congress (APC) of ex-military leader, General Mahamadu Buhari underscores a strengthening of Nigeria’s democratic credentials, however, Moody’s notes that economic challenges remain.

Incumbent Jonathan called his opponent Buhari to concede defeat shortly after the results of the elections were declared. There were fears that he would not accept defeat, a situation that could likely lead Africa’s populous nation into conflict.

Moody’s notes that Nigeria has held five general elections since 1999 and has organized elections involving rotations of power between the major parties regularly in its 36 states.

“The fact that incumbent Goodluck Jonathan conceded defeat shortly after the results and called on his supporters to exercise restraint will help avoid violence in the coming weeks,” it says.

The ratings agency argues that under President Buhari, who headed a military government in the 1980s, and focused his campaign on three main pillars: eliminating corruption, eradicating Boko Haram, reforming the oil sector and fighting corruption, promises significant economic dividends for Africa’s largest economy if successful.

“Domestic security, more generally, is likely to improve over his term, given Buhari’s northern origins and military credentials — military spending is likely to increase during his term. An improved security environment would support economic growth and development,” Moody’s says.

Moody’s believes that reforming Nigeria’s oil sector is also key, as major reforms, such as the Petroleum Investment Bill (PIB), have been stalled in Parliament by more than six years, adding that the current distribution of oil revenues has not prevented the income gap between the non-oil producing north and the oil-rich south of the country from widening, exacerbated in the northeast by the insurgency of Boko Haram, a long-term threat to the stability of the country.

Among other things Moody’s asserts that the federal government’s 2015 budget deficit target of 0.8% of GDP remains credible and its aim to raise $1 billion in non-oil revenues by, inter-alia, expanding corporate taxation and raising value-added tax, are also realistic and should support its budget target in 2015.

Moody’s also indicates that unlike many other oil producers that can use accrued savings to run counter-cyclical fiscal policy in the current downturn, the absence of fiscal buffers in Nigeria has led authorities to use the exchange rate to complement fiscal policy adjustment to absorb the shock of lower oil prices.

“The Central Bank of Nigeria has allowed the exchange rate to depreciate 23% since August 2014 against the US dollar, generating more naira per dollar earned for the government to cope with its spending,” it says.

It adds that, given the likelihood of further currency depreciation, “we believe that Nigeria’s current account will actually be in balance or register a small surplus in 2015. Foreign exchange reserves, which have fallen from $33.48 billion at the end of December 2014 to $30.42 billion at the end of February, stand at a still comfortable 5-6 months import cover,” it says.

Despite the external and fiscal headwinds facing the government at the moment, Moody’s says, Nigeria’s balance sheet is very strong.

“The government enjoys a very low level of overall debt — an estimated 14% at the end of 2014 — and access to a domestic capital market that is deep and rapidly developing,” it says, adding that, “the government’s external debt, moreover, is also very low — below 3% of GDP as of end of 2014, offering substantial headroom for further financing as the new administration assesses its policy options.”

The agency points out that, also supportive is the country’s growth prospects of 4-5% in 2015.

“The non-oil sector, which accounts for more than 85% of GDP, has helped the country grow by 8.3% annually over the last 10 years in real terms,” it says.

By Emmanuel K. Dogbevi