Another downgrade from S&P

Last week Standard and Poor’s (S&P) downgraded its sovereign rating for the FGN’s long-term, foreign currency obligations from B+ to B, and revised its outlook to stable from negative. The downgrade is based upon the worse-than-expected contraction in oil production, the foreign-exchange regime which S&P terms restrictive and delays to the FGN’s proposed fiscal stimulus. It offers the possibility of an upgrade if, for example, the FGN pushed through structural reforms and anti-corruption steps which enhance non-oil revenue collection. This rating action leaves S&P’s sovereign rating for Nigeria one notch below that of both Fitch and Moody’s. We are a little surprised by its timing after the exchange-rate reform in June.
The agency now sees GDP contraction of -1% this year and feeble growth of 2% y/y in 2017. This is in line with our forecast for both years.

The explanations for the projected recovery (through to 4% in 2018) are accelerated capital expenditure by government (now that the 2016 budget has been passed) and the liberalization of the fx regime. Other reforms (such as the creation of the Treasury Single Account, changes at the NNPC and the plugging of fiscal leakages) will be increasingly supportive in the medium term.

The special economic advisor to the president recently observed that the investment/GDP ratio had risen to 17.0% from 15.2% recorded in 2015. S&P sees the ratio declining to 17.1% from its 2016 estimate of 17.4%.

S&P expects inflation to settle at 15.0% y/y at end-year while its exchange rate projection is N300/US$ this year. We see higher inflation this year (18.0%) and a weaker naira (N325).

The deficit this year is expected to fall within the 3.6% of 2016 GDP gross borrowing requirement. The agency forecasts that the FGN will borrow up to 1.5% of GDP on a blended basis from multilaterals.

The agency puts the gross government debt/GDP ratio at 20% of GDP at end-2016, rising to 21.3% next year. While these levels compare favourably in any emerging market context, the weakness of the Nigeria debt story remains the cost of debt servicing.

Nigeria expects to raise US$1bn from the sale of Eurobonds by mid-December. We gather that all borrowing would be directed towards capital projects. We suspect that this downgrade will have limited impact on investor appetite.

To provide some sub-regional context, the republic of Ghana raised US$750m in early September from the sale of Eurobonds at a yield of 9.25%. It is struggling with a sizeable twin deficit and has run into difficulties with its IMF credit programme. The FGN will expect rather more competitive pricing.

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