Fitch Rating Agency Thursday noted that President Muhammadu Buhari’s recent economic policy pronouncements that tended to coalesce around state-led development to blunt the effects of declining oil receipts may not generate the stimulus the country needs to sustain growth.
In a statement released in London, Thursday, the agency said it was not convinced government’s current policy measures can promote growth while containing fiscal pressures facing the country at the moment. It however expressed concern over a number of downside risks the country faces in the aftermath of reduction in crude oil earnings.
It said “the emerging economic policies under President Muhammadu Buhari include an increase in public spending, state-directed investment, revenue-side reforms, and accommodative monetary policy. December’s mildly expansionary 2016 budget envisages spending of NGN6 trillion (USD30bn), up from NGN4.6 trillion in the 2015 budget, including a 30per cent increase in capital spending. The government aims to finance additional spending through revenue-side reforms, including improved tax collection and public finance management, and by increasing external financing. The fall in oil prices below the USD38/b level assumed in the 2016 budget has increased the need for external financing, and the government recently announced it is looking to the World Bank and African Development Bank for additional lending and is exploring a Eurobond issuance sometime in 1H16.”
But Fitch said “We think the drag on growth from the Nigerian private sector’s inability to access sufficient hard currency will outweigh the benefits of planned fiscal stimulus, and that the CBN will struggle to defend the naira indefinitely.” It recalled also that the erosion of fiscal and external buffers and policy uncertainty drove its revision of the Outlook on Nigeria’s ‘BB-’ sovereign rating to Negative in March 2015, which was affirmed in September. An economic policy response that contained fiscal pressures, kept debt levels manageable and carried out planned reforms would be positive for the rating. But an inadequate response that failed to carry out growth-enhancing reforms and put debt levels on an unsustainable path would have a negative effect on the rating.
It said the Central Bank of Nigeria (CBN), had taken a large role in implementing economic policy during last year’s six-month wait for cabinet appointments. It introduced exchange controls and restrictions on foreign currency and resisted pressure for further naira devaluation. The CBN cut benchmark rates by 200bp in November and reduced the cash reserve ratio for commercial banks, and has continued to restrict access to FX in 2016, limiting dollar sales to Bureau de Change operators.
It has maintained its support of the naira rather than risk the inflationary impact of devaluation. Overall, these policies present downside risks to Nigeria’s sovereign credit profile, although there are various mitigating factors: Increased borrowing and higher interest payments would add to pressure on the fiscal position. But public debt is low, and the government is unlikely to fully execute its spending plans. Underspending would reduce the negative impact on the public finances, but also the boost to growth. The government has indicated that it will use low energy prices to begin phasing out fuel subsidies in 2016, which would partly contain the deterioration in the public finances. Unorthodox or unpredictable FX policy makes raising external financing more difficult, deterring both private investors and possibly multilaterals. The persistent spread between the retail and official interbank exchange rate indicates unmet demand for dollars in the Nigerian economy.
