Moody's: Nigeria's government liquidity pressures rising amid growth and inflation challenges

While Nigeria's government should comfortably meet its financing gap over the next 12-18 months, increasing liquidity pressures, rising inflation and stagnant growth pose key challenges, says Moody's Investors Service in a report published today.

Moody's report, entitled "Government of Nigeria: FAQ on Credit Implications of Naira Depreciation, Low Oil Price and Broader Economic Challenges," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

The Government of Nigeria (B1 stable) continues to face low oil prices, volatile oil production, a spike in inflation that has eroded purchasing power, foreign exchange scarcity and an economy that has entered technical recession. Moody's projects stagnation in real GDP in 2016 and only subdued growth at 2.5% in 2017

"We expect that Nigeria will contain pressures on its public finances in the short term. However, there is greater doubt about the severity of the impact of these challenges, particularly on government liquidity and economic growth, over the medium term," says Aurelien Mali, a VP-Senior Credit Officer at Moody's.

Overall, Moody's views the recent devaluation of the naira as credit positive. The new system should enable the naira to better absorb external shocks over time, and dollar availability should gradually increase. Moreover, the fiscal benefit of the depreciation and the current oil price (which is above the budgeted oil price) exceeds the loss in oil output.

However, the depreciation implies a material loss in purchasing power given import-price inflation. Moody's expects inflation to accelerate to 18% by year's end, before falling to an average of 12.5% in 2017 (based on the recent 2 percentage point hike in the central bank's policy rate to 14%).

The rating agency expects that the depreciation will increase Nigeria's external debt marginally to 5.2% of GDP by end-2016 from 3.3% in 2015.

Moody's fiscal outlook for Nigeria's general government's fiscal position has not materially changed since April. The rating agency expects it to remain in deficit at around 3.7% of GDP in 2016, after posting a 3.8% deficit in 2015.

States and local governments will benefit from the naira depreciation, offsetting the negative impact on oil production from the recent attacks in the Niger Delta. Moody's expects authorities to reduce spending if revenues underperform.

Moody's notes that attacks on pipelines and key energy infrastructure in the Niger Delta have cut oil production to historic lows. If oil production stagnates at its current (or lower) level during the rest of the year, the expansionary spending envisioned by the current budget will be at risk, which would hurt growth.

Meanwhile, the Central Bank of Nigeria has sent strong signals to the market that it will prioritize stemming inflation over promoting growth, as well as supporting the return of foreign capital.