Fitch: Nigeria’s oil response has downside fiscal, growth risks

The federal government’s recent economic policy announcements show its 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 has said.

The global rating agency, in a statement yesterday, said though it was yet to be seen whether the associated measures adopted by the government would promote growth while containing fiscal pressure, it believed there are a number of downside risks.


The emerging economic policy of the President Muhammadu Buhari government includes an increase in public spending and state-directed investment, revenue-side reforms, and accommodative monetary policy.

The federal 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 $38/barrel 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 the first half of 2016.

Also, Fitch noted that 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 200 basis points in November and reduced the cash reserve ratio for commercial banks.

“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 per cent of total federal government spending in recent years and is estimated to have dropped to about 13 per cent 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 forex 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 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,” it added.

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