Fiscal mismanagement is spoiling the tailwinds from the bullish oil market, and the public accounts are in worse shape than ever.

General government revenues stood at 6.1% of GDP in 2021, one of the lowest ratios in the entire world.

The petrol subsidy is cutting into oil revenues, and during the initial four months of the year total revenues were 36.4% below the budgeted amount.

However, expenditure execution has remained close to the target, and debt interest payments currently represent 130.3% of total revenues.

HOLD: The attractive yields and the low debt stock relative to the size of the economy balances the da...

President Buhari is focused on protecting the status quo to improve the chances of the All Progressive Congress party winning the 2023 presidential race.

Candidates from the two major political parties, the All Progressive Congress and the Peoples Democratic Party, will once again be the main contenders for the presidency.

Fuel oil subsidies are consuming the additional revenues obtained by the crude oil industry thanks to the commodity bull market.

We revised our GDP growth forecast to 4.3% (up 1.9 p.p.), and we also increased our 2022 inflation rate forecast to 17.8% (up 3.4 p.p.).

Given the mix of a low debt burd...

The main political parties defined their presidential candidates for the upcoming 2023 general elections.

Former governor and senator Bola Tinubu won the ruling All Progressive Congress Party presidential primary.

Former vice president and 2019 presidential election runner-up Atiku Abubakar became the nominee of the Peoples Democratic Party.

Both candidates are quite controversial, and their political career fails to offer a glimpse of hope in terms of Nigeria's economic outlook.

HOLD: The country faces tightening international financial conditions and seemingly low-stake presidential elections, but debt ratios ...

The World Bank has urged Nigeria, once again, to reform its multiple exchange rate systems.

The premium in the parallel market has soared from 18.3% in 04-21 to 40.9% at the end of April.

Between export, remittances, and capital import, the country is currently receiving USD 6,821 mn on average per month, -26.9% less than in 2019.

We don’t expect changes in the current exchange rate policy framework.

HOLD: Good debt ratios offset the current administration’s poor economic  policy.

Nigeria recorded its fifth consecutive quarter of GDP growth with a 4.6% YoY expansion in Q4-2021, to round up the year with a 3.6% GDP increase.

The overall result was driven by the non-oil sector, mainly by telecom and trade which together generated 2.3 percentage points of the 3.6% growth.

The oil and gas industry output contracted for the second year in a row as a consequence of the OPEC+ agreement and operational issues that limited crude production.

Because of the external headwinds and the macroeconomic imbalances we expect a deceleration in the GDP growth for 2022, with a 2.2% projection for the year. 

...

The conflict between Russia and Ukraine has shocked commodity markets.

Oil prices have soared, improving Nigeria’s expected export and fiscal revenues.

Nonetheless, the reliance on fuel oil imports and its heavily subsidized price could offset the expected gains brought by the oil price rally.

Also, Nigeria’s most important non-oil import good is wheat, whose price has soared to levels not seen since 2008, causing food security concerns and increasing inflationary risks.

HOLD: The Russian invasion is having mixed effects on the Nigerian economy, as it boosts exports and revenues but also imports and publ...

President Muhammadu Buhari approved an 18-months suspension of the removal of fuel subsidy, previously scheduled to take effect by July-2022.

Authorities yielded amid growing pressures from unions and with the general elections of 2023 in mind.

Finance Minister Zainab Ahmed stated that the fuel subsidy costs about USD 7.0 bn a year, equivalent to 1.6% of GDP.

The Nigerian National Petroleum Corporation estimates that 42% of the fuel sold in Nigeria is smuggled out of the country.

HOLD: Despite the negative fiscal news that subsidy removals will be suspended, the credit is benefited by a strong oil rally, a ligh...

The need to remove electricity, fuel, and exchange rate subsidies will remain the focus in 2022.

However, given the unpopularity of structural reforms among the public, we don’t expect major changes to the fiscal or exchange rate policies.

We estimate that the primary deficit will reach -2.1% of GDP in 2022, 0.7 p.p. worse than the official forecast, while the overall balance will close at -3.8% of GDP.

After a V-shaped recovery in 2021, we expect the economy to grow just 2.4% in 2022, while inflation will remain on the higher side with a forecasted 14.4% YoY increase.

Neutral to good solvency and liquidity ra...

Both countries’ bonds have performed poorly in the last month, with their yields increasing between 35 and 40 bps on average.

Their sovereign curves are very similar, with Egypt’s being slightly steeper.

Given the economic fundamentals and political (in)stability, we see more value in the  short-end and belly of Egypt’s curve than in Nigeria’s.

OPEC oil production rose to 27.5 mn bl/d in October, a 0.8% increase, but the output remains below the group’s target.

Nigeria’s production averaged 1.35 mn bl/d in October, -3.2% against September and 0.25 mn bl/d below its allocation.

Despite the poor results from the oil industry, GDP expanded 4.1% YoY in Q3-2021.

The country is on track to reach our forecast of 3.1% GDP expansion for 2021, 0.6 p.p. higher than the official projection.

Neutral-to-positive solvency and liquidity ratios balance out poor macroeconomic expectations to justify retaining our HOLD recommendation.

Federal government balance stood at -2.6% of GDP until August 2021.

Falling oil output hurt federal government revenues, which stood 32% below the budgeted amount.

Total expenditure also fell short, but just by 10.6%, with personnel cost and interest payments representing 64% of total expenditure, and 165% of revenues.

We forecast a fiscal deficit of -4.5% of GDP for 2021, 0.6 p.p. worse than the official expectation. 

HOLD: Debt ratios remain solid, with the exception of those linked to fiscal revenues, but the credit is heavily exposed to highly volatile oil prices.

The Naira black market exchange rate has depreciated 20.0% YTD, but the official NAFEX has lost just 2.9% over the same period.

Since the unification of the exchange rate, the NAFEX rate has barely changed (-0.3%), failing to reflect a more market-driven behavior.

The scarcity of external assets has destabilized the FX market.

The government's answer to the crisis has been to tighten up its grip on the market by banning sales of forex to Bureau De Change operators and to go after a website publishing black market rates.

HOLD: Nigeria issued three bonds for a total USD 4 bn, but it still needs to increase fi...

The real GDP grew 5.4% year-on-year in Q2-2021, and 2.8% in H1-2021.

The result matched the expectation generated by high frequency indicators like the Purchase Managers Index, which has expanded non-stop during 2021, reaching 18 months high in July.

The result was driven by the non-oil sector, with a 7.1% increase in Q2-2021.

The oil output has been limited by the OPEC+ agreement, averaging 1.4 mn b/d in Q2-2021, -10.5% YoY fall.

Nigeria’s banking sector looks resilient enough to withstand balance sheet shocks.

Tier 1 capital ratio to risk-weighted assets grew slightly in Q1-2021 to 13.62%, above the 11.50% threshold established by the Basel III requirements.

Non-performing loans decreased in Q1-2021, but it remains above the Monetary Policy Committee target.

Returns on assets closed at 1.06% in Q1-2021 (-1.10 p.p. YoY variation), being one of the least profitable banking systems in our sample.

HOLD: Macroeconomic indicators are improving but not in the way they should, but for now, oil sales are supporting government revenues.

The fiscal position of the country kept worsening between Jan-May 2021.

Total revenue collection until May 2021 totaled NGN 2,777 bn (1.5% of GDP), -20.9% less than the budgeted amount.

Oil revenue stood at NGN 872 bn, 49.8% less than the budget forecast, partially as a result of the OPEC+ production agreement and higher-than-expected petrol subsidy expenses.

Total interest payments between January and May represented 97.8% of total revenues collected over the same period.

HOLD: Nigeria’s ability to cover external debt payments seems robust for now, but long-term risks are tilted to the downside and the domest...

The Central Bank of Nigeria (CBN) has adopted the more market-based Nafex rate as the government’s official exchange rate for the naira.

The CBN will now operate a managed float policy, which allows fluctuations driven by market dynamics, with regular interventions from the monetary institution.

The naira FX rate currently stands at 410.17 USD/NGN, a 7.1% devaluation from the previous official rate, but still 22.2% lower than the parallel market.

The new exchange rate policy should unlock the disbursement of a USD1,500 mn loan from the World Bank.

HOLD: The upcoming flurry of hard-currency funds will keep Nige...

After more than a year of expansionary monetary policy and low rates, doubts arise as to whether Africa's central banks will be able to maintain it

Amid concerns about the reactivation of the economies, inflationary pressures arise that put pressure on the monetary authorities

Central banks, which tend to act collectively, maintain a policy of greater tolerance to inflation to stimulate economic growth

Nigeria advances towards a new issuance of at least USD 3bn in Eurobonds.

Using a reference issuance of USD 3.5 bn, we came up with two possible structures of the issuance.

NGERIA is a HOLD due to offering an unattractive yield for its risk level, but the issuance could bring interesting tactical opportunities.

We focus on the largest African commodity exporters within the EMFI universe, which would benefit from the current price boom.

The benefits of a bull commodity cycle will enhance liquidity buffers and help improve fiscal accounts, but getting countries back on a debt sustainability path takes more than that.

The emerging countries that benefit must take advantage of the tailwinds to undertake structural changes that can improve long-term solvency.

Violence and crimes are on the rise this year, as kidnappings and killings by unlawful groups affect large swaths of the country.

The Global Terrorism Index list Nigeria third overall in the world, mostly due to the activities of the Boko Haram jihadist group.

The Chandler Good Government Index ranks Nigeria's government as the third-worst among the 104 countries analyzed, only ahead of Venezuela and Zimbabwe.

Buhari’s government is facing criticism from its own party allies.

HOLD: The current prices at which the debt is traded and the net profit that a new commodity supercycle would imply make us decide t...

Authorities started deregulating the downstream sector back in April 2020, but have not been able to go the whole way.

Local petrol prices haven’t been updated since January 2021, despite the increase in international crude oil prices.

At the current consumption levels, the total subsidy is estimated at USD 11 mn a day.

The new Petroleum Industry Bill is being discussed in the National Assembly, which is aiming to approve it by April 2021.

HOLD: The current prices at which the debt is traded and the net profit that a new commodity supercycle would imply, make us decide to HOLD the position in Nigeria.

Nigeria came out of the pandemic-induced recession in Q4-2020, as the quarterly GDP grew 0.01% YoY.

The result was driven by positive outcomes in activities like crop production, telecom, real state, and food and beverage that grew 3.7%, 17.6%, 2.8%, and 2.1% YoY, respectively.

In aggregated annual terms the economy contracted -1.8% against 2019.

The inflation rate was 15.8% in 2020, and in February 2021 it accelerated to 17.3%, the highest rate since March 2017.

HOLD: GDP results and higher oil prices are positives for the credit, but the upsides will likely remain limited until we see evidence that fiscal revenues...

Commodity prices have performed spectacularly after the chaos of March 2020: Precious metals (+ 25%), Gas (+ 66%), Oil (+ 254%), Copper (+ 93%) and Coal (+ 74%)

Some short-term conditions such as the stimulus packages of the main economies, inflationary risks and the weakness of the dollar promote a rise in real assets

Increased industrialization in India and the maintenance of government spending at high levels, support the boom in the long term

For now we know that there is a rise in prices, but there is no certainty that there will be a supercycle of several years because all the long-term factors are variable

Of...

In November 2020, the G20 countries and the Paris Club agreed on a common framework to deal with LICs with debt problems

The common framework seeks to provide more comprehensive support that goes beyond the pandemic shock

The key differences with the DSSI are that it has no time limitations, and requires both private sector involvement and IMF engagement

General government revenue in 2020 is expected to have been just 5.9% of GDP, a contraction of 1.1 p.p. vs 2019.

Nigeria's fiscal revenue is closely related to its oil-related income, accounting on average over the last decade for approximately 60% of total revenues.

Over the past 4 years debt service has accounted, on average, for 26% of total expenditure, and has represented 57.9% of total revenues of the federal government balance.

Nigeria has one of the lowest ratios of revenue to GDP of the continent, at 5.9% of GDP in 2020 against 27% of GDP in the second-largest economy of the continent, South Africa. 

We assess the attractiveness of NGERIA bonds, which are among the lowest yielding on the “B-” credit rating group. 

A low debt-to-GDP ratio is the main positive factor outweighing low economic growth, extremely-low fiscal collections, and high annual debt service payments.

NGERIA bonds have the highest durations among their comparables.

Going forward, we believe that any upside will be tied to oil prices. Upsides will be limited unless the recent bullishness in the oil market is sustained, so maintaining our HOLD rating seems appropriate.

We forecast economic growth of 2.3% in 2021, from an expected contraction of -2.6% in 2020.

Inflation stood at 15.8% in 2020, and we expect a 14.0% annual price change in 2021.

Debt/GDP ratio stood at 18.6% at the end of the Q3-2020 and is forecasted to close at 19.0% in 2021.

There are growing risks of social unrest as a consequence of corruption, violence, and poor economic results, but the lack of short-term elections could provide some political stability.

HOLD: The bonds’ uptrend seems to have run out of gas. Looking ahead, it is likely that positive news on the oil front remains the most important d...

On October 8 a series of nationwide protests against the Special Anti-Robbery Squad unit from the police started, accusing it of a long list of crimes against regular citizens.

Authorities announced on October 11 the immediate dissolution of the special unit SARS, however people stayed on the streets demanding more changes in the entire police body.

Amnesty international reports so far 56 people have died since the protest erupted in October.

HOLD: Positive performances are counterweighed by delicate domestic political dynamics. Further, oil’s uptrend suddenly stopped after concerns over a second strand of the COVID...

GDP contracted for the second consecutive period in 3Q20, registering a -3.1% y-o-y variation.

Inflation accelerated again in October, when the consumer price index registered a y-o-y increase of 14.2%, reaching a 31-month high.

Unemployment closes in 27.1% in 2Q20, up from the 23.1% recorded in 3Q18. 

HOLD: Nigeria benefitted from stronger production and prices in the oil business over the month.

Pressure grows on China, as one of the world's main creditors, to enter the DSSI without restrictions

The terms of China's agreements with emerging or frontier nations are extremely aggressive compared to members of the Paris Club

One issue to keep an eye on is the participation of Chinese state banks in the renegotiations, as these entities hold about 75% of the country's total debt

Chinese authorities have spoken with 20 countries about the DSSI, and it has approved relief for an amount close to USD 3 bn for 10 countries

Angola and Zambia are the countries that most urgently need to address a restructu...

On December 6, a spokesperson of the Nigerian Attorney General's Office said that the government filed a new and substantive challenge in the English Courts in its attempt to appeal the ruling that would force the government to pay USD 9.6 bn to Process and Industrial Developments Ltd (P&ID). In 2012, P&ID led the Nigerian government to arbitration for the failure of a gas supply agreement.

The new evidence argues that “the gas supply and processing agreement was acquired on the basis of fraud and corruption, while the subsequent arbitration process was plagued by irregularities and was deliberately concealed from t...

On December 2, in an interview on the sidelines of a regional conference of the International Monetary Fund (IMF) in Dakar, Finance Minister Zainab Ahmed stated that they could issue debt in international markets during the first quarter of 2020 to complete the Budget financing. The amount the government offers will be determined by how much it raises from multinational banks such as the African Development Bank.

The 2020 budget estimates a fiscal deficit of USD 6.0 bn. Adding the debt service (USD 6.1 bn), the financing needs for next year would amount to USD 12.1 bn, which represents 2.6% of GDP.

On November 26, President Muh...

After years of unsuccessful efforts to change oil production regulation, the Nigerian government has reformed the 1993 deep offshore and inland law. The reform includes an escalating royalty as oil prices rise. The government has estimated that the reform will generate at least USD 1.5 bn in additional revenue by 2021.

The reform that inject uncertainty into the sector is the new right of the Minister of Petroleum to conduct reviews of production-sharing contracts every eight years.

Although in the short term, the change will deliver the intended increase in fiscal revenues, in the long-term the new taxes could discourage oil i...

On November 3, Joseph Attah, Customs Public Relations Officer, reported that Nigeria will keep its land borders closed to trade until at least January 31, 2020. The government plans to install a scanner on the border with Benin, one of the largest rice smuggling routes, and it will remain closed until the scanner is fully operational. Last month, the customs office had already announced that trade across Nigeria's land borders would be suspended indefinitely to fight rice smuggling.

Since 2006, the Nigerian government has banned rice imports from its neighboring country, Benin, to try to encourage local rice production. Nigeria o...

On October 28, Senate President Ahmad Lawan, denounced that most revenue-generating agencies have failed to remit their funds to the treasury of the federal government, which would end up affecting the implementation of the 2020 national budget; which will be under consideration of the upper legislative chamber on November 5. Similarly, Lawan warned about new indebtedness that the federal government will incur to fund the budget.

The budget estimates that revenues would amount to USD 22.5 bn, an increase of 16.4% compared to 2019 budget. On the other hand, expenditures are projected to reach USD 28.5 bn, 15.8% above this year&rs...

The government is trying to recover up to USD 62 bin of international oil companies, using a ruling from the Supreme Court in 2018 which enables it to increase its share of income from production-sharing contracts. According to a document prepared by the attorney-general’s office and the Justice Ministry, the energy companies did not meet the requirement of the 1993 contract law, which specifies that the state should receive a greater share of revenue when the price of oil exceeds USD 20 per barrel (USD/bl).

On September 18, President Muhammadu Buhari formed a council of economic advisors. The team is formed by Doyin Salami, a respected professor of economics, who is part of the monetary policy team of the Central Bank of Nigeria, Charles Chukwuma Soludo, former central bank governor, a former Barclays Bank executive, Bismarck Rewane, the former chief presidential economic advisor, Ode Ojowu and the former IMF representative in the country for Sierra Leone, Iyabo Masha.

On September 12, the Organization of the Petroleum Exporting Countries (OPEC) agreed to reduce their oil production. 

Nigeria compromised to reduce its production by 57 thousand barrels per day in the OPEC+ meeting in order to approach to the target production agreed by the group on December 6 of last year. August oil output stood at 1.84 million barrels per day (mbd) according to the OPEC secondary sources, 155 tbd above the target.

On the other hand, on September 12 the federal government approved a 44% increase in value-added tax (VAT). The VAT rate goes from 5% to 7.2% and the revenue will be used to finance in large p...

According to the report published by the National Statistical Office published on September 3, real GDP grew 1.94% year-on-year in the second quarter of 2019. The figure is a slowdown compared to the result of the first quarter of the year, when the economy grew 2.10% year-on-year. The second quarter result appears far from the 3% growth projected for 2019 by the central bank of Nigeria.

On July 16, a court in the United Kingdom issued a ruling in favor of the natural gas company Process and Industrial Developments Ltd (P&ID) against the government of Nigeria. This ruling gives the company the right to try to confiscate USD 9.6 billion in assets of the Nigerian government. The case refers to a 2010 agreement in which the Nigerian government agreed to supply gas to a processing plant in Calabar that P&ID, a company founded by two Irish businessmen specifically for the project, would build and manage

On July 30, the Nigerian government formed a task force to recover around NGN 5.5 trillion (USD 15 billion) of bad loans acquired by Asset Management Corp. of Nigeria (AMCOM) after the banking crisis of 2009. The agencies responsible for prosecuting debtors are the Economic and Financial Crimes Commission (EFCC), the Nigeria Financial Intelligence Unit (NFIU), the Independent Corrupt Practices Commission (ICPC) ) and the Ministry of Justice. According to Muiz Banire, president of AMCON, there are high probabilities that most of the debt will be collected, because 67% of the loans falls on 20 debtors. 

On July 23, the International Monetary Fund (IMF) raised its growth forecast for Nigeria's economy for fiscal year 2019 to 2.3%. This means an increase of 2 basis points (bp) compared to its April projection. By 2020, the IMF expects growth to reach 2.6%, 1 bp more than in its previous forecast.

The economy has progressively recovered from a GDP fall of -1.6% in 2016. In 2017, its growth was 0.8% and in 2018 it increased to 1.9%. In the first quarter of 2019 (1Q2019), GDP registered a 2% increase in year-on-year terms.