Fitch Reports Nigeria's Oil Response Has Downside Fiscal, Growth Risks

The Nigerian authorities’ recent economic policy announcements show the response to the oil price shock is coalescing around state-led development to boost economic growth and import substitution to blunt the effects of declining oil receipts, Fitch Ratings says. It is yet to be seen whether the associated measures will promote growth while containing fiscal pressures, but we believe there are a number of downside risks.
The emerging economic policy under President Muhammadu Buhari includes an increase in public spending and state-directed investment, revenue-side reforms, and accommodative monetary policy. December’s mildly expansionary 2016 budget envisages spending of NGN6trn (USD30bn), up from NGN4.6trn in the 2015 budget, including a 30% increase in capital spending. The government aims to finance additional spending through revenue-side reforms, including improved tax collection and public finance management, and by increasing external financing.
The fall in oil prices below the USD38/b level assumed in the 2016 budget has increased the need for external financing, and the government recently announced it is looking to the World Bank and African Development Bank for additional lending and is exploring a Eurobond issuance sometime in 1H16.
The Central Bank of Nigeria (CBN), took a large role in implementing economic policy during last year’s six-month wait for cabinet appointments. It introduced exchange controls and restrictions on foreign currency and resisted pressure for further naira devaluation. The CBN cut benchmark rates by 200bp in November and reduced the cash reserve ratio for commercial banks.
nigeriaThe CBN has continued to restrict access to FX in 2016, limiting dollar sales to Bureau de Change operators. It has maintained its support of the naira rather than risk the inflationary impact of devaluation.
Overall, these policies present downside risks to Nigeria’s sovereign credit profile, although there are various mitigating factors:
Increased borrowing and higher interest payments would add to pressure on the fiscal position. But public debt is low, and the government is unlikely to fully execute its spending plans. Capital expenditure, for example, has constituted only about 20% of total federal government spending in recent years and is estimated to have dropped to about 13% for 2015. Underspending would reduce the negative impact on the public finances, but also the boost to growth.
The government has indicated that it will use low energy prices to begin phasing out fuel subsidies in 2016, which would partly contain the deterioration in the public finances.
Unorthodox or unpredictable FX policy makes raising external financing more difficult, deterring both private investors and possibly multilaterals. The persistent spread between the retail and official interbank exchange rate indicates unmet demand for dollars in the Nigerian economy.
We think the drag on growth from the Nigerian private sector’s inability to access sufficient hard currency will outweigh the benefits of planned fiscal stimulus, and that the CBN will struggle to defend the naira indefinitely.
Erosion of fiscal and external buffers and policy uncertainty drove our revision of the Outlook on Nigeria’s ‘BB-‘ sovereign rating to Negative in March 2015, which we affirmed in September. An economic policy response that contained fiscal pressures, kept debt levels manageable and carried out planned reforms would be positive for the rating. An inadequate response that failed to carry out growth-enhancing reforms and put debt levels on an unsustainable path would have a negative effect on the rating.
Source: Fitch Ratings, Inc.
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