Risk drivers and outlook
- A 2020 recession is in the cards following covid-19 outbreak and collapse in oil prices.
- Nigeria’s financial position will weaken significantly in 2020.
- International financial assistance is required to deal with the crisis.
- Another devaluation of the naira is likely.
- The fragile security situation continues to weigh on the country risk profile.
Facts & figures
- Largest African economy (GDP and population)
- Major economic potential (agriculture, trade hub, hydrocarbon/mining)
- Low external and public debt stock
- Severe security risk (ethnic and religious tensions) and environmental risk (oil-related pollution)
- Unappealing business environment (large infrastructure gaps, deficient electricity, corruption)
- Interventionist (monetary) policies and complex multiple exchange rate system
- Weak public-revenue collection capacity
Head of State
- President Muhammadu Buhari
- 195.9 m
Per capita income
- USD 1,960
- Lower-middle income
Country risk assessment
The impact of the covid-19 pandemic will shrink Nigeria’s economy
In March 2020, Nigeria got hit by both the Russia–Saudi Arabia oil price war and the spread of the covid-19 that added to the collapse of international oil prices (with an average of 35.6 USD per barrel in 2020 according to IMF WEO data of April 2020, coming from 61.4 USD per barrel in 2019). On 8 June, the World Health Organisation reported 12,486 confirmed cases of covid-19 in Nigeria and 354 deaths, making Nigeria the second most affected country in Sub-Saharan Africa (after South Africa). A range of measures have been implemented to contain the spread of the virus, including the closure of international airports, public and private schools, universities, stores and markets, and the suspension of public gatherings. A ‘lockdown’ was declared in Lagos, Abuja, Kano state and Ogun state. Although the number of confirmed cases continues to grow, a phased and gradual easing of the lockdown measures was approved on 21 May. The economy is expected to fall into a -3.4% recession in 2020. GDP growth projections set around 2.5% for 2021 might be too optimistic given the high degree of uncertainty about the duration and scale of the covid-19 outbreak, especially in Africa. Ever since the previous Nigerian oil crisis in 2016, GDP per capita has been falling every year and is expected to continue to shrink at least until 2025.
Oil dependency proves once again to be a key vulnerability
The oil sector accounted for 49% of public revenues and 56% of total foreign exchange earnings in 2019. Due to a lack of diversification coupled with years of mismanagement and evasion of oil funds, the relentless fall in oil prices hit Nigeria particularly hard in 2016 and again in March 2020. Oil production is also expected to drop as lower prices prompt production ‘shut-ins’ for some of the higher-cost fields, while generally the plunge in global demand adversely impacts oil shipments. In 2020, both exports (oil and remittances) and imports are expected to tumble, leaving the current account in a 3.3% of GDP deficit (22.5% of current account receipts). Large capital outflows (capital flight of oil money) often lead to a negative external balance of payments and put pressure on foreign exchange reserves. Foreign exchange reserves dropped to USD 38.1 billion (4 months of import cover) in 2019 and are expected to further reduce in 2020, reflecting the weakening current account and large portfolio investment outflows.
Greater currency flexibility and international financial assistance will be required to deal with the crisis
The 2020 financing gap in Nigeria’s balance of payments is expected to be substantial, leaving the country with very high external financial needs. Consequently, the Nigerian authorities are seeking financial assistance and are engaged in negotiations with the World Bank, the African Development Bank, the Islamic Development Bank and Afreximbank for budget support loans. The IMF has approved a Rapid Financing Instrument (RFI) of USD 3.4 billion for Nigeria, its largest covid-19 emergency financing package so far. The rest of the financing gap is likely to be filled by further drawdowns on foreign exchange reserves. The defence of the official exchange rate of the naira puts additional downward pressure on Nigeria’s foreign exchange reserves. Therefore, greater exchange rate flexibility will be required to deal with the impact of the crisis. The official exchange rate was already devalued by 17.5% in March, bringing it closer to parallel rates, yet further devaluation is highly likely.
State interventions are expected to continue during Buhari’s second term
The People’s Democratic Party managed to hold on to power from democratisation in 1999 until 2015, when Goodluck Jonathan was defeated by former military ruler Muhammadu Buhari of the opposition coalition (APC). These 2015 elections marked the first peaceful and fair handover of democratic power to the opposition in Nigeria’s history, despite the religious polarisation and distrust that fast-tracked during the campaign. During the February 2019 general election, Muhammadu Buhari won a second presidential term by a decisive margin although the election period reconfirmed the sharp political division between Nigeria’s north and south. Interventionist economic policies, such as import restrictions on a significant number of goods, capital controls and direct interventions by Nigeria’s Central Bank, were introduced under Buhari’s presidency and are likely to be maintained during his second term. Moreover, the government promotes a nationalistic vision of agricultural self-sufficiency, which weighs down on the agriculture GDP growth while the output gap encourages informal food imports (smuggling) and hikes in food prices. The closure of land borders, import limits, violence in crop producing areas, extreme weather conditions and limited domestic production have been raising the risk for food insecurity and have driven inflation into double digits since 2016, with estimates predicting it to reach almost 14% by the end of 2020.
Despite a limited debt stock, Nigeria’s public finances exhibit great vulnerabilities
Nigeria’s fiscal deficit is set to grow to a substantial 6.8% of GDP in 2020 (coming from 5% in 2019) and is projected to reach 5.7% of GDP in 2021. Together with the exchange rate depreciation, this will raise the public debt level to 34.8% of GDP in 2020 (coming from 29.1% in 2019). Thanks to its very favourable starting point, the public debt is projected to reach only a sustainable 37% of GDP by 2023. Nigeria’s main fiscal weakness is its extremely low government revenues to GDP ratio, which is among the lowest in the world due to a very limited (non-oil) tax base and weak institutional capacity. Indeed, government revenues reached only 7.9% of GDP in 2019. Yet, due to the recent crisis, this level is set to drop down to 4.9% in 2020 and 5.6% in 2021. Consequently, public interest payments are expected to absorb a staggering 40.8% of the 2020 revenues. Moreover, the public debt to revenues ratio is expected to exceed 700% in 2020, an unsustainable level. It also poses severe risks to domestic debt obligations (18% of GDP in 2020) as limited revenues have frequently led to a significant accumulation of payment arrears by the government.
Nigeria’s total external debt ratio would reach a very limited 28.7% of GDP (195% of current account receipts) in 2020. However, the external debt service burden is expected to grow beyond 38% of current account receipts in 2020 (coming from 21% in 2019), the highest level since the early 90s. As yearly debt services are projected to balance around 30% of current account receipts over the coming years, Nigeria’s financial position has weakened significantly.
Nigeria’s MLT political risk classification was downgraded in May 2020
Nigeria’s financial and economic indicators were still recovering from the previous oil crisis in 2016 when it got hit by both the oil price collapse and the outbreak of covid-19 in March 2020. Its external debt sustainability and fiscal soundness will be substantially affected, weakening the country’s general creditworthiness. As a result, Credendo decided to downgrade Nigeria’s medium- to long-term political risk classification from category 5 to 6. Besides its low fiscal revenue collection capacity and the overreliance on a volatile oil sector, the fragile political situation and severe security risks also weigh on Nigeria’s country risk profile. The pastoralist conflict in the Middle Belt has been intensifying and Boko Haram continues to destabilise the north-east. In the south, the Niger Delta pipeline attacks resumed and form an ongoing threat to oil production and the environment. It remains to be seen whether sufficient government resources will be made available to stem the surge of violence in central and northern Nigeria. The numerous security crises seem to be beyond the federal government’s competence to manage, complicated by corruption, the covid-19 outbreak and the absence of government control in several regions of the country.
Analyst: Louise Van Cauwenbergh – firstname.lastname@example.org