Nigeria: Risk Assessment
Country Risk Rating
|D||A high-risk political and economic situation and an often very difficult business environment can have a very significant impact on corporate payment behavior. Corporate default probability is very high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
The non-oil sector could struggle to power activity in 2016
Non-oil sectors are expected to remain fairly dynamic. This should be the case for the services, notably telecoms. Construction is likely to record a good performance. Activity in the manufacturing sector could, however, be limited by erratic electricity supply as well as currency controls restricting the importing of 41 types of goods. Oil production is likely not to increase in 2016, owing, both, to attacks on petroleum infrastructures by rebels (Niger Delta Avengers) in the Niger Delta, producing the majority of Nigerian oil, and low prices. Furthermore, the lack of a legal framework (negotiations between executive and legislative for the adoption of the Petroleum Industry Bill expected since 2008 are suspended) discourage investment in the sector. Overall, investment, already affected by insecurity and administered prices is likely to decline because of weak domestic demand and the interest rate of the central bank (CBN) increased from 12 to 14 % in July 2016. With oil production value dropping by a third, the contribution made by net exports to growth should be slightly negative. Private consumption is expected to remain limited by the high level of inflation, which increased in annual rate from 9.6 to 16.5% between January and June 2016. Price increase is expected to be fueled by the pass-through of imported goods inflation related to the sharp devaluation of the naira, triggered by the dropping of its peg to the US dollar, but above all by the rise in administrated prices. In the end, 2016 growth is expected to be very weak, and may even be negative, a first since 1984.
The budget deficit would worsen, but the current account deficit would stabilize
Despite the drop in its revenues, with around 75% coming from the oil and gas sector, the widening of the public deficit should be limited because the devaluation leads to an increase in the naira equivalent of oil receipts in dollar which is only partly consumed by the effect of the rise in inflation on expenditure. Either way the government decided to increase expenses, notably in infrastructures, which the country lacks. However, the budget being adopted more than four months after the beginning of the year, investment expenditure could be adjusted downwards. The cut in the heavy subsidies on food and fuel prices is slowed down by legislators’ reluctance and legal recourse.
The current account deficit that emerged in 2015 is not expected to widen. The reduction in oil exports (90% of the total), attributed to the combined effect of volume and price, is likely to be offset by the fall of imports due to higher import prices and decline in investment. Moreover, repatriation of dividends will be less important.
Downward pressure on the naira pushed the CBN to introduce measures during 2015 prohibiting the purchasing of currencies for the importing of certain goods, with the aim of protecting its reserves (approximately 5 months of imports). The situation becoming unbearable the CBN had to put an end to the dollar peg and to let the naira float on June 20th 2016. Between this date and August, the naira went from 197 naira for one dollar to 320. Despite the implementation of a flexible exchange rate regime, CBN reserves the right to intervene on the markets and maintains foreign exchange control measures enforced in summer 2015 on about 40 products, thus maintaining the existence of a parallel market. The banking sector, heavily exposed to the oil and gas sector (around a quarter of all loans) is feeling the ramifications of lower oil prices, as well as the problems of accessing foreign currency met by some companies. As a result of persistent mistrust of foreign investors and local actors shortage of foreign currencies is likely to last.
Confrontations with Boko Haram jihadists and sabotages in the petroleum area
The victory of Muhammadu Buhari and his newly created AII Progressive Congress party in the 2015 elections represents a real change of power after the domination of the People’s Democratic Party since 1999. The new President has made fighting corruption one of his priorities (Nigeria was in 194th place out of 215 in 2014 in the World Bank classification). Considerable efforts will be needed within the administration of the 36 federated states, which have adopted bad habits when oil wealth was abundant. Expectations within the population are huge with regard to the new President, particularly in this area. An overly slow implementation of reforms, but also a too fast reduction in subsidies in the context of sluggish growth, could give rise to increased social tensions and instability. . The security situation remains very unstable in the north-east of the country under attacks from the Boko Haram radical Islamist movement. In the Niger area, the greatest provider of oil, rebels ask for a better distribution of resources. While their vandalism stopped with the monthly payment of money by the Federal State, the halt of the latter in February 2016 led to a revival of the sabotages, forcing the authorities to restore it in August. The president being a Muslim from the north doesn’t make negotiations any easier.