Moody’s urges Nigeria to seek alternative revenue source to avoid future oil shocks

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Credit rating agency, Moody’s Investors Service, has stressed the need for the government to improve its ability to generate revenue.

Moody’s in a report released noted that although Nigeria’s economy, external positions, and public finances were expected to stabilise, its continued dependence on oil and gas meant it would face a range of challenges in the coming years.

According to Moody’s Vice President/Senior Credit Officer and co-author of the report, Aurélien Mali noted that both Nigeria and Angola have seen their credit profiles come under pressure following the oil price shock in 2014, however, revenue generation remains a key weakness for Nigeria, while Angola will find it hard to cut its already sizeable debt load as its kwanza currency continues to depreciate.

Nigeria and Angola are two of Sub-Saharan Africa’s largest economies, accounting for close to 40% of the nominal GDP of the sovereigns that Moody’s rates in the region. While increased oil production will support a pick-up in growth for both countries in 2018; they face challenges in attracting more investment in a low oil price environment.

Recently, Moody’s assigned a B2 rating for Nigeria’s annual credit analysis but highlighted its worries about the government’s continued dependence on oil revenue and the high level of budget deficit.

Moody’s also expects the government budget deficit to decline slightly by 1.1% to 3.6% of GDP in 2017 and 0.4% to 3.2% of GDP in 2018. While Internally Generated Revenue (IGR) has improved in some states, a majority of them are largely dependent on Federation Account Allocation Committee (FAAC) allocations and with an impending election in 2019, this could mean the country’s deficit may widen rather than drop.

The report said

“INCREASING NON-OIL TAX INTAKE REMAINS ONE OF THE BIGGEST CHALLENGES BOTH COUNTRIES FACE IN THE COMING YEARS. THE NIGERIAN AUTHORITIES’ EFFORTS TO INCREASE NON-OIL REVENUE SINCE LATE 2015 HAVE BEEN LARGELY UNSUCCESSFUL.”

The report noted that the increase in Nigeria’s debt profile was much slower in recent years and it expects it to stabilise at around 20 percent of GDP in 2018.

Recall that Moody’s had projected a stable outlook for Nigerian Banks. This was contained in a report titled “Banking System Outlook – Nigeria”.

According to the report:

“DESPITE THE STABILIZATION IN BANKS’ FOREIGN CURRENCY FUNDING AND LIQUIDITY PROFILES, MOODY’S EXPECTS BANK EARNINGS TO COME UNDER PRESSURE.

“NIGERIAN BANKS’ PROFITABILITY WILL NEVERTHELESS DECLINE ON ACCOUNT OF LOWER YIELDS ON GOVERNMENT SECURITIES, AS WELL AS A LIKELY REDUCTION IN INCOME FROM DERIVATIVES. HOWEVER, THESE PRESSURES WILL BE PARTIALLY OFFSET BY A RECOVERY IN LOAN GROWTH AND TRANSACTION INCOME FROM THE EXPANSION OF DIGITAL PLATFORMS.”

It also believes the banks capital adequacy ratios (the ratio of a bank’s capital to its loans) will decline over the next one year to 18 months.

Moody’s Investors Service, often referred to as Moody’s, is the bond credit rating business of Moody’s Corporation. It was founded by John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings.

Moody’s Investors Service provides international financial research on bonds issued by commercial and government entities. It ranks the credit-worthiness of borrowers using a standardised rating scale which measures expected investor loss in the event of default.

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