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. - Source: Coface

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.

Strengths

  • Leading African power in GDP terms; most populous country in Africa
  • Significant hydrocarbon resources (eleventh in the world for proven reserves, ninth for gas, not counting unproven reserves)
  • Considerable agricultural potential (fifth-largest cocoa producer in the world) and mining potential (gold, barite, tin, zinc)
  • Relatively low public and external debt

Weaknesses

  • High unemployment and underemployment
  • Heavily dependent on oil revenues (90% of exports, typically about 60% of tax revenues)
  • Low tax revenues (6.5% of GDP)
  • Poor economic diversification; insufficient agricultural production due to lack of infrastructure and insecurity
  • Insufficient oil refining capacity (80% of refined products imported) and gas transport capacity
  • Insufficient electricity generation and distribution capacity
  • Manufacturing activity represents just 10% of GDP, despite the Made in Nigeria (MINE) project aiming to increase it to 20%.
  • Illegal gold mining
  • Deficiencies in transport infrastructure: ports, roads, railways
  • Ethnic and religious tensions
  • Insecurity and corruption constraining the business environment
  • Pollution linked to oil development

Current Trends

Oil-driven growth

Oil revenues, which are so critical to Nigeria, fell in 2020. In 2021, as they recover, albeit partially, activity should pick up again, although at a modest pace. Household consumption (77% of GDP) is expected to remain sluggish. Households will face high inflation, much of it imported, as 80% of products sold are imported. The weak naira, import restrictions (importers of around 40 food products cannot access the regulated foreign exchange market) not offset by domestic production, and restrictions on trade with neighboring countries since October 2019 all contribute to this. Domestically, pressures will be created by the removal of the fuel price cap to encourage investment in refining, but also by the gradual increase in electricity prices, again with the objective to encourage investment. Unemployment is set to remain high and growth will be insufficient to maintain per capita income, due to strong population growth. Investment (23% of GDP) will not be robust either. Public investment was cut in 2020 and any increase in 2021 will correspond to the continuation of ongoing projects. The same applies to the private sector, which is not expected to restart. In the hydrocarbon sector, foreign companies are gradually withdrawing from onshore deposits due to high production costs (average cost per barrel: USD 20 to 22) and strained relations with the Nigerian National Petroleum Company. Further out, however, they may step up their presence in the offshore and gas sectors if the new oil law, which has been in the works for 20 years, is adopted. Meanwhile, construction of the Nigerian group Dangote’s 650,000 bpd-capacity refinery is set to be completed. Credit will remain expensive (around 20%), even after the central bank cut the policy rate to 11.5% in November 2020, i.e. below the inflation rate. Credit to the private sector is expensive because of crowding-out by the public sector and substantial exposure to hydrocarbons. Fiscal stimuli will remain weak given the deterioration in the accounts. Accordingly, the difficulties will not be confined to the oil sector, but will continue to affect the other sectors, due to persistently limited spillover of oil revenues. Prospects will remain brighter in agriculture (22% of GDP), information technology and telecommunications.

 

Domestic debt, scarce foreign currency

Despite the support plan, spending increased by only 0.5% in 2020 due to cuts in non-essential spending. Since, at the same time, revenues fell with oil revenues, the deficit widened. As oil prices rise, the deficit should narrow, but will be unlikely to disappear with a breakeven price of USD 140 per barrel. Financing requirements will continue to be covered essentially by the domestic market, which is highly liquid and inexpensive due to negative interest rates on naira debt. However, the Treasury could be forced to obtain financing from the central bank if multilateral assistance is not forthcoming. Recourse to international markets will remain impracticable. Even if the debt, which essentially domestic, continues to represent a small share of GDP, in 2019 debt interest accounted for a quarter of public expenditure and 60% of revenues, which are low, and these levels will probably increase in the future.

The current account deficit shrank in 2020, despite the emergence of a small trade deficit linked to the fall in hydrocarbon revenues, which was partially offset by import compression, and the reduction in expatriate remittances (6.5% of GDP in 2019). This was due to the decrease in the service and revenue deficits resulting from reduced oil freight and lower repatriated profits. The fact that foreign investors were not always able to access foreign currency to transfer the proceeds of their investments in local currency contributed to this. The central bank wants to stabilize its foreign exchange reserves, which is why it is also restricting importers’ access to foreign exchange. However, despite emergency assistance from the IMF (amounting to 0.6% of GDP), the central bank had to devaluate the official exchange rate twice in 2020, bringing it closer to the NAFEX, or investor & exporter exchange rate, which is the most widely used rate and which is set by banks, while the parallel rate showed a difference of 25% as of mid-November 2020. The central bank could be forced to do the same again in 2021 due to the persistent weakness of foreign investment (direct and portfolio), with the World Bank making the payment of aid (0.5% of GDP) conditional on unifying the exchange rates and scrapping energy subsidies.

 

Persistent challenges for the president

President Muhammadu Buhari was re-elected in 2019. He faces a myriad of security challenges, starting with the activities of the Islamist terrorist group Boko Haram in the northeast of the country. These have forced many people to flee their homes, with the country recording almost two million internally displaced people since 2015. Deadly clashes between herders and farmers continue to affect the central part of the country, threatening food security. The closure of borders with Cameroon, Niger and Benin in an effort to reduce food smuggling and promote national production is causing tensions with these countries. Added to this is the threat of renewed attacks against oil infrastructure in the Gulf of Guinea, and of theft and sabotage of facilities in the Niger Delta. The president will have to halt the decline in living standards that began with the oil counter-shock of 2014-2016 and that has been amplified by the COVID-19 crisis. Widespread poverty, corruption, mass unemployment and persistent double-digit inflation are expected to continue to fuel a tense social climate, illustrated by the violent protests in Lagos in late 2020.

 

Source:

Coface (02/2020)
Nigeria