Recession: Moody’s Warns of Dire Economic Consequences For Nigeria

recession

Global rating agency, Moody’s, yesterday, warned of a further contraction of the Nigeria, while it disclosed that the declining value of the naira would engender a marginal increase in Nigeria’s external debt to 5.2 per cent of Gross Domestic Product, GDP, by end of 2016 from 3.3 per cent in 2015.

This came as expert blamed the long awaited passage of the Petroleum Industry Bill, PIB, and lack of good governance to reasons for poor returns expected to cushion the effect of the downturn in the price of crude at the international market.

Moody’s, in a Global Credit Research report released in Dubai, cautioned that while the Federal Government of Nigeria should comfortably meet its financing gap over the next 12 to 18 months, increasing liquidity pressures, rising inflation and stagnant growth pose key challenges.

In the report titled, ‘Government of Nigeria: FAQ on Credit Impications of Naira Depreciation, Low Oil Price and Broader Economic Challenges,’ Moody’s said, “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 per cent in 2017.”

The rating agency projected a deficit of around 3.7 per cent of GDP in 2016 for Nigeria, compared to a deficit of 3.8 per cent deficit in 2015. Commenting on the development, Aurelien Mali, Vice President and Senior Credit Officer at Moody’s, said, “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.”

Moody’s, however, noted that it views the recent devaluation of the naira as credit positive, stating that the new system should enable the naira to better absorb external shocks over time, while 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,” it said.

Moody’s disclosed, however, that the depreciation implies a material loss in purchasing power given import-price inflation, adding that it expects inflation to accelerate to 18 per cent by year’s end, before falling to an average of 12.5 per cent in 2017, based on the recent two percentage point hike in the Central Bank’s policy rate to 14 per cent.

Moody’s said, “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 under perform.

“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.

“However, 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.”

Meanwhile, a renowned Petroleum Economist and President, Nigerian Association for Energy Economics, NAEE, Professor Wumi Iledare, has attributed non-passage of Petroleum Industry Bill, PIB, poor governance among others as reasons for the country’s recession.
According to the University don, “The uncertainty in the Petroleum industry, has brought about zero activities in the petroleum industry, which has in turn resulted to zero revenues that should have supported the economy in a time as this.

“There is no money because of the low crude price, production level is down; and there is no activity ongoing in the oil and gas business. It is a recipe of disaster.”

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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