Nigeria will recover from stagnation in 2016 to 2.5% GDP growth in 2017 – Moody’s

02 Sep 2016
Financial Nigeria

Summary

Moody's said it views the recent devaluation of the naira as credit positive since the new system will improve dollar availability and enable the naira to better absorb external shocks over time.

Aurelien Mali, Vice President/Senior Credit Officer, Moody's

Moody’s Investor’s Service said it expects Nigeria’s government to face increasing challenges with financing deficits over the medium term as the country battles liquidity pressures, rising inflation, and stagnant growth.  

The ratings agency gave its outlook in a report titled “Government of Nigeria: FAQ on Credit Implications of Naira Depreciation, Low Oil Price and Broader Economic Challenges,” which was published today.

“We expect that Nigeria will contain pressures on its public finances in the short term. However, there is greater doubt about the severity of the impact of these challenges, particularly on government liquidity and economic growth, over the medium term,” said Aurelien Mali, a Vice President/Senior Credit Officer at Moody's.

The ratings agency has projected that Nigeria’s real GDP will stagnate in 2016 and grow by 2.5 percent in 2017. The forecast was informed by the fact that Nigeria continues to face low oil prices, volatile oil production, a spike in inflation that has eroded purchasing power, foreign exchange scarcity, and an economy that has entered technical recession.

Moody's said it views the recent devaluation of the naira as credit positive since the new system will improve dollar availability and enable the naira to better absorb external shocks over time. Furthermore, the ratings agency said the fiscal benefit of the depreciation and the current oil price (which is above the budgeted oil price) exceeds the loss in oil output.

The downsides of the naira devaluation, according to Moody’s, is it implies a material loss in purchasing power given the import-price inflation.

“Moody's expects inflation to accelerate to 18% by year's end, before falling to an average of 12.5% in 2017 (based on the recent 2 percentage point hike in the central bank's policy rate to 14%). The rating agency expects that the depreciation will increase Nigeria's external debt marginally to 5.2% of GDP by end-2016 from 3.3% in 2015,” the ratings agency said.

Moody's said its fiscal outlook for Nigeria's government's fiscal position remains unchanged from the last ratings action in April. The rating agency said it expects the government to remain in deficit at around 3.7% of GDP in 2016, after posting a 3.8% deficit in 2015.
“States and local governments will benefit from the naira depreciation, offsetting the negative impact on oil production from the recent attacks in the Niger Delta. Moody's expects authorities to reduce spending if revenues underperform,” the ratings agency said.

“Moody's notes that attacks on pipelines and key energy infrastructure in the Niger Delta have cut oil production to historic lows. If oil production stagnates at its current (or lower) level during the rest of the year, the expansionary spending envisioned by the current budget will be at risk, which would hurt growth.”


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