We attended a briefing in Lagos yesterday, hosted by Moody’s Investors Service. The agency’s projections for Nigeria’s economy are favourable. Following the -1.5% y/y contraction in GDP last year, it projects GDP growth at 2.5% y/y in 2017 followed by 4% y/y in 2018. The growth forecast is on the back of positive base effects for the oil economy, government measures to expand specific non-oil sectors, the FGN’s commitment to fund large infrastructure projects post-2017 budget passage as well as expected uptick in global oil prices.
Moody’s oil price projection for 2017 is between US$40/b and US$60/b. We see Bonny Light at an average of US$57/b this year.
As for inflation, the rating agency’s projections for 2017 and 2018 are 17% y/y and 13% y/y respectively. Increased supply of fx was cited as the primary reason for the 2018 inflation forecast. These forecasts compare with our estimates of 16.7% and 13.5% y/y respectively.
Moody’s made the point that the current fx liquidity in the market is more cyclical than structural, driven mainly by a recovery in oil earnings and to a lesser extent international borrowings. If oil earnings should fall again, it believes that the CBN is more likely to reduce FX sales than run down reserves in order to preserve creditworthiness – essentially a return to the strategy that prevailed through most of last 12-15 months.
Moody’s publicly rates six commercial banks which represent 65% of total assets in the Nigerian banking system. The ratings agency’s view on the Nigerian banking sector is that it is challenged but resilient; its outlook on Nigerian banks is largely stable.
This stable outlook reflects the agency’s expectation that acute fx shortages will ease gradually as Nigeria’s oil and gas export revenues stabilise. However, it expects loan risks to remain high.
The agency expects the sector’s non-performing loans (NPL) ratio to rise marginally to 14-16% from 14% at end-2016. These ratios are close to the levels seen in 2010, but below the recent peak of 33% in 2009 when the sector was effectively under water. It expects the increase to be driven by exposures to the oil and gas sector, import-dependent borrowers as well as from foreign-currency loans.
Its current rating for Nigeria is B1 with a stable outlook. An upward revision is not on the cards at least for the next 12- 18 months.
Some downside risks for Nigeria’s sovereign rating as cited by Moody’s include oil price volatility, continued erosion of debt affordability, rising political risk and the lack of sound governance and transparency.