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S&P Global Affirms Nigeria’s Credit Outlook Remains Stable at ‘B-/B

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S&P, a global credit ratings agency, at the weekend affirmed that Nigeria’s credit outlook will remain stable in 2024, with short-term foreign and local currency sovereign credit worthiness at ‘B-/B’, while long and short-term national scale ratings was pegged at ‘ngBBB+/ngA-2’.

The ratings agency stated that this position is on the back of ongoing monetary, economic and fiscal reforms, including the liberalisation of the naira and the elimination of the fuel subsidy as well as steps to boost non-oil revenues and increase domestic refining capacity.

But the report stated that while S&P believes these policies should benefit Nigeria’s creditworthiness over the long run, managing the current effects on inflation and the exchange rate remains challenging.

The stable outlook, it said, balances the government’s capacity to continue the reform agenda, which, if delivered, should support growth and fiscal outcomes, against below-potential oil production and risks to macroeconomic stability and confidence from inflationary pressures as well as a volatile currency.

On the downside, the agency stated it could lower the ratings over the next 12 months if it sees increasing risks to Nigeria’s capacity to repay commercial obligations.

“This could arise, for instance, from significantly reduced usable foreign currency (FX) reserves, much higher fiscal deficits or debt-servicing needs, or because domestic financial markets are unwilling to absorb additional local currency debt issuance,” it said.

But on an upside scenario, the ratings agency noted that it could raise its ratings over the next 12 months if Nigeria’s economic performance significantly exceeds its forecasts, and fiscal and external imbalances improve significantly.

It recalled that in mid-2023, soon after being sworn in, President Bola Tinubu enacted a series of the aforementioned reforms as the federal government now focuses on mobilising non-oil revenue, improving the security environment, increasing oil output, and enacting anti-corruption measures.

“Institutional challenges threaten the successful implementation of this policy shift by authorities, given, for instance, the high level of informality in the economy, and the two-tiered federal and state tax system.

“Over the past decades, previous governments have attempted to reduce corruption at the state and local government levels with limited success.

“While we expect the Tinubu administration’s policy changes to support the macroeconomic environment in the medium term, there are risks to their implementation.

“These risks include the reversion to previous practices of monetising fiscal deficits and tightening currency controls, without investing sufficiently in productivity and governance improvements in the oil and non-oil sectors,” the report pointed out.

It noted that capital flights and currency depreciation will persist if Nigeria fails to address its high inflation and weak balance of payment position, explaining that interest costs on government debt are high and absorb a large share of government spending, that is, around 20 per cent of revenue last year.

At the same time, S&P said government tax revenue collection, as a percentage of Gross Domestic Product (GDP) remains very low compared with peers’.

The firm said it expects a quorum of the Monetary Policy Committee (MPC) to be re-established in early 2024 and tighter monetary policy to be enacted, which should reduce inflationary pressures.

While gross FX reserves fell to $32.9 billion at end-2023 from $37.1 billion at year-end 2022, it emphasised that at the End-January 2024, gross FX reserves stood at $33.4 billion, explaining that despite short-term inflation-related obstacles, the new government’s reform initiatives should support medium-term growth.

“Until Nigeria improves its underlying balance of payments position, capital flight will linger, currency depreciation will persist, and inflation will remain elevated.

“In the medium term, exchange-rate liberalisation could benefit the non-oil sector as domestic goods become more competitive, although domestic supply chains remain underdeveloped and a high dependency on imports is likely to continue,” it added.

The elimination of fuel subsidies, the organisation said, saved an estimated 1.3 per cent of GDP during 2023, according to its estimates.

Quoting the International Monetary Fund (IMF) data, it said 37 per cent of the labour force works in household enterprises outside the agricultural sector, with just 11 per cent of Nigerian workers engaged in wage employment, primarily in the public sector.

“Given the composition of the labour force, and its high informality, increasing tax pressure is a key fiscal challenge, and explains the continued relative dependency on hydrocarbon production for tax revenue,” it stressed.

As a result of current efforts, alongside some investment in new production, S&P said it expects oil production to slowly recover to 1.52 mbpd in 2024, but remain below Nigeria’s new and reduced quota of 1.58 mbpd.
“An overhaul of the governance structure and fiscal terms in the oil sector under the Petroleum Investment Act (PIA), it said should, over time, unlock further investment in the hydrocarbons sector, despite environmental considerations.

“We anticipate that refining capacity will substantially increase as a large refinery (and petrochemicals facility)–owned by the private-sector Dangote group, with capacity of 650,000 barrels per day–starts large-scale production in 2024.

“In addition, several other refineries–such as at Port Harcourt, Warri, and Kaduna–are being rehabilitated, which should significantly contribute to the country’s refining capacity in the next few years. This anticipated new refining capacity made it easier for the new president to stick to the removal of the petroleum subsidies as pledged in the 2023 budget.

“We expect Nigerian economic growth to average 3.3 per cent over 2024-2027 (roughly 1 percentage point above population growth). While reforms will improve growth in the later years of our forecast period, in 2024, tightening monetary and fiscal policy could dampen growth potential.

“Growth in terms of GDP per capita will remain low, partly reflecting the country’s high population growth as well as the recent depreciation of the Nigerian naira,” it added.

According to the US based ratings agency, the government’s focus on non-oil revenue mobilisation should help improve the fiscal position in 2024 and 2025, as it works to simplify the tax code, modernise collections and administration, and increase compliance.

“Securitisation of the ways and means facility has improved the interest to general government revenue position, but the ratio remains high, averaging about 22 per cent over 2024-2027.

“Despite current account surpluses, we anticipate limited growth in usable FX reserves, given the strong demand for FX in the economy.

“Over 2024-2027, we project some fiscal consolidation, which will be supported by savings made via the elimination of the petroleum subsidies and an increase in the collection of non-oil taxes and other revenue owing to ongoing digitisation and improved compliance, and savings on interest costs due to the securitization of the central bank’s Ways and Means advances.

“Revenues will also be supported by naira depreciation, which improves oil revenues in naira terms. We project the general government deficit–which includes the federal government, states, and local governments combined–will stand at 4.0 per cent of GDP in 2024, following an estimated 4.6 per cent in 2023, down from an almost 6 per cent average over 2020-2022,” it added.

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