Nigeria’s Slow Reform Pace Impedes Moody’s Credit Rating

Nigeria’s slow implementation of structural economic reforms is limiting its chances of a credit-rating upgrade, Moody’s Investors Service said.

While economic growth in Africa’s biggest crude producer is “resilient,” any chance of an update from its Ba3 rating, three levels below investment grade, is hindered by corruption, weak institutions and its vulnerability to oil price drops, Edward Al-Hussainy and Dietmar Hornung, credit analysts at Moody’s said in a statement today.

Sub-Saharan Africa’s second-largest economy expanded an estimated 6.6 percent in the first quarter of the year, compared with 6.9 percent in the previous three months, the central bank said last week, citing figures from the West African nation’s statistics bureau. Oil contributes as much as 70 percent of the government’s fiscal revenue, leaving it sensitive to a downturn in global prices, Moody’s said.

“Momentum for addressing challenging structural reforms has slowed,” Al-Hussainy and Hornung said. “Most critically, legislation to revise the fiscal regime in the petroleum industry and to deregulate the downstream oil and gas sector has stalled, holding up significant foreign investment while the sector’s productivity declines.”

Fiscal Terms

A proposed law to reform regulation and funding of the nation’s oil industry has been stalled in parliament since it was first sent to the National Assembly in 2008. Fiscal provisions in the Petroleum Industry Bill seek to raise Nigeria’s share of revenue to 73 percent from 61 percent, Petroleum Minister Diezani Alison-Madueke said in September. Energy companies operating in Nigeria say the fiscal terms will make offshore oil exploration unprofitable.

Royal Dutch Shell Plc, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA run joint ventures with the state-owned Nigerian National Petroleum Corp., or NNPC, that pump more than 90 percent of the country’s oil. Bonny Light crude, one of Nigeria’s main export blends, has fallen 12 percent to $105.81 a barrel by 1:20 p.m. in London since this year’s peak on Feb. 8.

Violence in the north caused by an Islamist insurgency and increased unrest in the oil-rich Niger delta have also “elevated risks” in Nigeria, Moody’s said.

Nigeria has faced worsening sectarian turmoil in the north, where the government has been battling Boko Haram since 2009. The militant group, whose name means “Western education is a sin,” seeks to impose Islamic rule on the country and has killed thousands over the past three years, according to the U.S. Embassy in Abuja, the capital.

Tipping Point

The government lost about $1 billion last month because of missed oil production targets, Finance Minister Ngozi Okonjo-Iweala said last week in an interview in Cape Town.

Production fell to 1.81 million barrels a day in March, the lowest level since September 2009, according to data compiled by Bloomberg. Output averaged 2.2 million barrels a day in the first quarter, according to figures released by the NNPC on April 17. That compares with a production forecast of 2.53 million barrels a day used in this year’s budget. The loss was due to crude theft and pipeline sabotage, according to NNPC.

“This violence has the potential to stall foreign investment and is increasingly a fiscal drag on spending by state and local governments,” said Moody’s.

While Nigeria isn’t “at a tipping point,” it said, “political risks are amplified by the combination of rising poverty and inequality, political dis-empowerment, entrenched religious and ethnic tensions, and extraordinary levels of corruption.”