COVID-19, oil price spillover strain Nigeria's economic growthth, says Moody's

The Moody's Investors Service has briefed Nigeria's severely strained economic growth due to COVID-19 strains, and oil price shocks in its annual report, according to a report by This Day.

The report mentioned that Nigeria's credit profile reflects weak government finances, constrained by a narrow revenue base hindering fiscal consolidation in the economy.

It also noted political influences on the credit challenges in the country which arose with Boko Haram conflicts, attacks on oil basements in Niger Delta, and unequal income distribution.

As stated in the report COVID-19 has downturned Africa's economy, with regional contractions in the economy for the first time in decades. It anticipated that Nigeria's economy would contract by 3 per cent in 2020, compared with 2019's growth of 2.2 per cent, due to several pandemic and oil price strains. Explaining that the containment period ceased functioning of economic activities, affecting domestic and foreign trade, along with coupled global spillovers in oil prices.

It stated that despite improvement in the third quarter of the year, "overall contraction will represent Nigeria's worst recession in the last 25 years."

Moody's added: "The shock is likely to continue to restrict the economy over the next few years. The economy took three years to record growth above two per cent following the 2016 oil price shock, still below population growth. The current shocks will amplify Nigeria's existing credit vulnerabilities. In the near term, a significant drop in oil revenue will reduce the country's already extremely low tax base, undermining fiscal strength and reducing the government's capacity to support the economy. In addition, pressure on the fragile balance of payments could intensify, threatening external and macroeconomic stability. In the longer term, the pandemic's impact on growth, particularly in the large informal sector, is still uncertain and could weaken economic strength."

Anticipating that Nigeria's real Gross Domestic Product (GDP) growth will reach 2.1 per cent in 2021, which will be backed by a rebound in oil prices internationally, foreseeing $45 per barrel in 2021 from $41 in 2020 and 2020's base effect. It reads, "however, risks remain given the uncertainty over how long coronavirus-related disruption to the global economy will last. Similar to other African economies, Nigeria is particularly exposed given its largely absent social safety net, coupled with limited fiscal and monetary ammunition to support the economy, which has reduced economic disruption in larger, more advanced economies. Beyond 2021, we currently assume that oil prices will return to a medium-term range of $45-$65 per barrel as demand recovers and supply adjusts further, supporting Nigeria's economic recovery. Overall, we expect real GDP growth to remain sluggish and insufficient to increase living standards over the next two years".

Aurelien Mali, report's co-author and Moody's Vice President and the Senior Credit Officer, said: "after this year's economic contraction, Nigeria's deficit will remain high and debt levels will continue to rise quickly, albeit from a moderate level. The country's weak institutions and governance framework also constrain the credit profile and have significantly affected both economic growth and the government's fiscal strength."

It further stated that Nigeria's credit resilience possessed its large and diversified economy, reinforced by substantial hydrocarbons resources and substantial domestic demand in medium-term. Adding the increasingly deep and diverse domestic capital markets.

It stated that the negative outlook on Nigeria's sovereign rating represents that a rating upgrade was unlikely in short- to medium-term.

"The outlook would likely move to stable if Moody's were to conclude that the government's fiscal and economic policy response to the coronavirus pandemic is effective in mitigating rising fiscal and external vulnerability risks and limiting the pandemic's long-term negative economic and social implications. A rating downgrade would be likely if Moody's were to conclude that the government is unlikely to be able to alleviate the damage to its revenue and its balance sheet, leading to rising liquidity and external risks to levels no longer compatible with a B2 rating," it added.