By Jeph Ajobaju, Chief Copy Editor
Africa’s two largest economies, Nigeria and South Africa, are expected to recover slowly in 2019 but their growth may still dip far below the levels between 2011 and 2015.
Latest projections by Moody’s Rating anticipate Nigeria’s growth at 2.3 per cent this year from an estimated 1.9 per cent in 2018.
That will ride largely on the back of oil sales which account for 95 per cent of the Nigerian economy.
Week ending January 11, demand for Nigerian crude oil rose in Europe with the number of unsold cargoes dropping steadily from 20 to 12 or less.
European refiners are buying more Nigerian crude, driven partly because the drop in Iranian exports hit by United States sanctions tightens supply in the Mediterranean.
The cases of Nigeria and South Africa are part of the few bright spots in Moody’s 2019 negative outlook for Sub-Saharan African (SSA) sovereigns.
This reflects ongoing fiscal and external challenges despite easing credit pressures.
Government of Nigeria rating is B2 stable. However, this report is not about credit rating.
In South Africa, Moody’s projects real Gross Dometic Product (GDP) growth to reach 1.3 per cent in 2019 from an estimated 0.5 per cent in 2018.
Debt ratios across Africa
Most governments across the African region plan further fiscal consolidation this year, although progress remains gradual amid still soft growth conditions in some cases.
The presence of International Monetary Fund (IMF) programmes across the continent supports the fiscal outlook and reform impetus for 2019.
With few exceptions, Moody’s expects government debt ratios to deteriorate only marginally or stabilise in 2019, reflecting ongoing fiscal consolidation and the positive impact of higher growth rates on the denominator of debt-to-GDP.
That said, debt trajectories for a number of sovereigns remain vulnerable to lower-than-expected growth, exchange rate depreciations and contingent liability risk from weak state-owned enterprises.
Debt affordability will continue to weaken in a number of countries.
Exposures to tightening global financing conditions vary across the region. Sovereigns with large current account deficits, high external debt repayments and large shares of foreign-currency debt are likely to continue to experience external pressures.
Faster economic expansion
Political risk remains a key credit constraint for several SSA sovereigns.
The sources of political risk — ranging from domestic civil unrest, conflicts, succession risk, or simply from policy unpredictability — and their credit implications vary across the region.
However, credit pressures in some SSA nations should ease in 2019 as credit profiles display some resilience at their lower rating levels.
Moody’s Investors Service sees regional economic growth expanding at a faster pace than last year.
It expects SSA’s gradual economic recovery of 2018 to continue this year, with regional real GDP growth accelerating to 3.5 per cent in 2019 from an estimated 2.8 per cent in 2018.
Moody’s says it “expects government debt ratios to deteriorate only marginally or stabilise in 2019, reflecting ongoing fiscal consolidation and the positive impact of higher growth rates on the denominator of debt to GDP.
“Debt trajectories for a number of sovereigns remain vulnerable to lower-than-expected growth, exchange-rate depreciations and contingent liability risk from weak state-owned enterprises.”
Fifteen of the 21 sovereigns that Moody’s rates in SSA have a stable outlook, while six hold a negative stance.
“Our negative outlook for sovereigns in Sub-Saharan Africa is driven by persistent credit challenges related to their ongoing fiscal and external vulnerabilities,” explains Daniela Re Fraschini, Assistant Vice President, Analyst and author of the report.
“That said, we expect credit pressures to ease relative to previous years, despite a more challenging external environment, as credit profiles display some resilience at their lower rating levels.”
Monoeconomy exposes Nigeria to shocks
Nigeria’s credit profile (B2 stable) is constrained by the sovereign balance sheet’s continued exposure to shocks because the government has been unable to expand its non-oil revenue base sufficiently, according to Moody’s Investors Service.
“Although oil revenue [rose] in 2018, deficits remain elevated relative to revenue and debt affordability is still weak but improving,” said Aurélien Mali, a Moody’s Vice President, Senior Credit Officer and co-author of the report.
“We expect debt levels to remain contained at around 20 per cent of GDP in 2019.”
Credit strengths include the large size of the economy and the country’s robust medium-term growth prospects, supported by strong domestic demand.
The economy has emerged from a 2016 recession, though real growth remains subdued.
Higher oil prices and oil production of around 2 million barrels per day (mbpd) helped the economy to improve in 2017.
Nigeria’s ranks near the bottom of a number of international surveys assessing institutional strength.
Surveys point to the country’s relative weakness compared to peers in respect of rule of law, government effectiveness and control of corruption.
Challenges of non-oil tax revenue
Increasing the non-oil tax take remains one of Nigeria’s greatest challenges.
Only a durable increase in non-oil revenue will improve its resilience to oil price volatility and increase realisation rates of capital spending on the large infrastructure projects that are crucial to its economic development.
Until it does, the government’s balance sheet will be exposed to further shocks. Deficits will remain elevated and debt affordability challenged.
The stable outlook on Nigeria’s sovereign rating reflects the low likelihood of a shock that further impairs Nigeria’s economic and fiscal strength.
External vulnerabilities have receded, supported by a rebound in oil prices and production.
Structural institutional improvements and reforms that increase the diversification of government revenue away from oil would be positive for Nigeria’s credit profile.
A sufficient increase in fiscal savings with the potential to offset a protracted economic shock would also be positive.
Downward pressure could emerge in the event of a prolonged slowdown in growth and investment, an extended deterioration in Nigeria’s fiscal position or further delays in implementing key structural reforms, particularly in the oil sector.