Nigeria’s efforts at broadening non-oil revenue base have so far proven largely unsuccessful, Moody’s says

Moody’s Investors Service, often referred to as Moody’s, the international bond credit rating business of Moody’s Corporation, has said Nigeria’s efforts at broadening its non-oil revenue base have proven largely unsuccessful, which advised it to downgrade the country’s sovereign issuer rating to B2 with a stable outlook on November 7.

Specifically, Moody’s downgraded the Government of Nigeria’s long-term issuer and senior unsecured debt rating to B2 from B1 and the senior unsecured MTN program rating and the provisional senior unsecured debt rating to (P)B2 from (P)B1. It, however, said the rating outlook remains stable.

Moody’s said the first driver of its rating action is Nigeria’s slower than anticipated progress in addressing its key structural weakness, which is its significant reliance on a single sector to drive government revenues as well as growth and exports.

“The authorities’ efforts to address the key structural weakness exposed by the oil price shock by broadening the non-oil revenue base have so far proven largely unsuccessful,” it noted, adding that government balance sheet remains structurally exposed to further economic or financial shocks on account of high-interest payments relative to revenues.

“The oil shock severely weakened Nigeria’s public finances, with general government revenues suffering a 50 percent decline between 2014 and 2016 (from 10.5% of GDP to 5.3% respectively). The damage wrought by the oil price shock has not yet been undone, and the downgrade reflects Moody’s view that this weakness in Nigeria’s public finances will remain for some years to come,” it said.

“As a consequence, while debt levels remain contained and notwithstanding recent cyclical improvements, the government’s balance sheet remains structurally exposed to further economic or financial shocks, with interest payments very high relative to revenues and deficits elevated despite cuts in capital spending,” it added.

To this end, Moody’s forecasts general government revenue to average only 6.4 percent of GDP over 2017-2019, the lowest level of any sovereign rated by Moody’s.

“The stable outlook reflects the fact that the likelihood of a shock occurring that would further impair Nigeria’s economic and fiscal strength remains low, with external vulnerabilities having receded supported by the rebound in oil production,” it stated, adding that it projects Nigeria’s current account to remain in surplus with reserves boosted through external borrowings and increased foreign capital inflows.

“Medium-term growth prospects are also credit supportive.”

Concurrently, Moody’s has lowered the long-term foreign-currency bond ceiling to B1 from Ba3 and the long-term foreign currency deposit ceiling to B3 from B2. The long-term local-currency bond and deposit ceilings remain unchanged at Ba1.

The rating agency said the results of the authorities’ efforts to increase non-oil revenue since late 2015, which have focused on improving compliance and broadening the tax base, have been limited and negatively impacted by a contractionary environment in 2016.

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“The Federal Revenue Inland Service (FRIS) has been able to increase non-oil revenue by 15 percent in nominal terms as of September 2017 compared to 2016, but this is at a pace that is below nominal GDP growth,” it stressed, adding that the independent re-appropriation of revenues from the ministries, departments, and agencies (MDAs) has yielded less than projected results for two consecutive years, highlighting the considerable execution risks inherent in the transition to a less oil-dependent budget.

“Hence, while the rebound in the oil price and in oil production has led to oil revenues outperforming the 2017 budget target, non-oil tax revenues are still below target with a 30 percent shortfall for the federal government at the end of September compared to budget and likely a similar situation for states and municipalities,” Moody’s highlighted.

It also noted that the challenges on the revenue side will negatively impact potential growth, that since 2014, the authorities have offset revenue shortfalls with large cuts in much needed capital expenditure, a trend that Moody’s expects to continue.

“In 2017 the government is likely to only match 2016 capital spending that reached N1.2 trillion (or 1.2% of GDP), given the 2017 budget is expected to run on a six-month cycle (for capital expenditures only) as the 2018 budget is likely to be passed in January.

“This is less than 50 percent of the 2017 budget for capital spending and still an insufficient level to have a meaningful impact on the large infrastructure gap that significantly constrains the country’s potential growth.”