FG Protests Moody’s Downgrade, Reveals Plan to Sell JV Oil Assets

• Targets $2bn from proceeds of sale to investors
• PENGASSAN warns against divestment to fund budget

Obinna Chima and Solomon Elusoji

The Nigerian government Wednesday “strongly” rejected the reasons one of the global rating agencies, Moody’s Investors Service, gave for its decision to downgrade the country’s long-term issuer and senior unsecured debt rating to ‘B2’ from ‘B1’.

Moody’s in a statement Wednesday also downgraded the country’s senior unsecured MTN programme rating and the provisional senior unsecured debt rating to ‘(P)B2’ from ‘(P)B1,’ while retaining a stable outlook on Nigeria.

In its reaction to the downgrade, the federal government reeled out the reform initiatives it has undertaken in the last two years to turn around the economy, including its intention to raise N710 billion ($2 billion) this year from the restructuring of the government’s equity in the joint venture oil assets, as highlighted in the 2018 budget.

“The reform is aimed at increasing private sector equity participation to improve efficiencies in the sector and also provides revenue to the government which will be deployed solely and exclusively for creating new assets in Nigeria,” the federal government said in a detailed statement protesting the sovereign downgrade.

The federal government also pointed out that while the Federal Ministry of Finance, Central Bank of Nigeria (CBN) and the Debt Management Office (DMO) respect the right of Moody’s to make this decision, “we strongly disagree with the premise and must address some of the conclusions upon which the decision rests”.

“This is equivalent to Nigeria’s existing B/Stable Outlook rating from S&P and slightly lower than Nigeria’s B+/Negative Outlook rating from Fitch,” said the federal government.

According to the federal government, since Nigeria was last rated by Moody’s as B1 stable in December 2016, the country has successfully emerged from a protracted recession and recorded important improvements across a broad range of indices.

It listed these indices to include a return to economic growth of 0.55 per cent in the second quarter of 2017, and returning business confidence as evidenced by a PMI index of 55.0.
Furthermore, the Nigerian government pointed out that the country has continued to witness a stable foreign exchange window for importers and exporters, with improving liquidity and convergence of the parallel and official rates.

This, it stated, has led to significant improvement in the country’s foreign exchange reserves, now totalling $34 billion.
Other positive indices which the government listed included: “Increased oil production, combined with stable and now improving oil prices. Slowly improving revenue profile, with non-oil revenue (principally taxes) up by 10 per cent.

“Month-on-month improvements in inflation levels since January 2017, with inflation continuing to trend downwards. Strong year-on-year improvement on the World Bank Ease of Doing Business Rankings from 169th to 145th place, a 24 place move in one year.”

According to the Nigerian government, in 2016 the country recorded the highest capital expenditure deployment since 2013, making investments in critical infrastructure to support further growth.

“At the heart of Moody’s rationale is the need for Nigeria to improve non-oil revenue aggressively. This is absolutely and directly aligned to the government’s priorities.

“This is critical to our economic development and is the basis for the establishment of a stable and inclusive economy, which can withstand global shocks and has the resources to increase investments in our infrastructure,” it added.

In addition, the federal government stated that it had put in place a number of measures to improve its revenue collection, stating that the Federal Inland Revenue Service (FIRS) has made good progress in increasing revenues.
It listed the efforts by the FIRS to include the introduction of a tax amnesty (the on-going Voluntary Assets and Income Declaration Scheme – VAIDS), which is showing positive results, and plugging leakages and deployment of technology-driven revenue management strategies.

“An example is Health Pay, a pilot cashless revenue project in the health sector, which has recorded material increases in revenue.

“We have seen improvements in revenue in 2017. Fiscal revenues are linked directly to both the performance of the economy and the number of taxpayers contributing. As a result of the foundation that has been established in 2017, we expect similar positive trends in 2018.

“Our revenue initiatives are changing the mix of revenue sources available to government from the traditional oil or debt to a combination of oil, debt and domestic revenue.
“For example, the 2018 budget includes N710 billion proceeds from the restructuring of the government’s equity in the JV oil assets.

“The reform is aimed at increasing private sector equity participation to improve efficiencies in the sector and also provides revenue to the government which will be deployed solely and exclusively for creating new assets in Nigeria,” it said.

Continuing, the federal government also addressed Moody’s concern that while Nigeria’s debt levels remained low, interest was consuming a larger portion of revenue.

“It should be noted that we are implementing a very prudent fiscal and debt management strategy to reduce the cost of our debt. Given the relatively higher domestic interest rates, we are focusing on longer term external borrowing with an aim of rebalancing our domestic and international debt portfolio to a 60:40 split over the coming years.
“Our existing proposal to refinance $3 billion of treasury bills through external borrowing is expected to reduce Nigeria’s debt servicing costs, further improving our fiscal position.

“We also expect this strategy to help to reduce the ‘crowding out’ effect of government borrowing in the domestic market.

“The challenges that are highlighted in the Moody’s rating are clear, and are being addressed by the government, with the environment having improved significantly since the last period of assessment.”

However, Moody’s explained that it took the decision to downgrade Nigeria because the authorities’ efforts to address the key structural weakness exposed by the oil price shock by broadening the non-oil revenue base had “so far proven largely unsuccessful”.

As a consequence, the agency stated that while debt levels in the country had remained “contained and notwithstanding recent cyclical improvements, the government’s balance sheet remains structurally exposed to further economic or financial shocks, with interest payments very high relative to revenues and deficits elevated despite cuts in capital spending”.

It added: “The stable outlook reflects the fact that the likelihood of a shock occurring that would further impair Nigeria’s economic and fiscal strength remains low, with external vulnerabilities having receded supported by the rebound in oil production, the current account projected to remain in surplus, and reserves boosted through external borrowings and increased foreign capital inflows. Medium-term growth prospects are also credit supportive.
“Concurrently, Moody’s has lowered the long-term foreign-currency bond ceiling to B1 from Ba3 and the long-term foreign currency deposit ceiling to B3 from B2. The long-term local-currency bond and deposit ceilings remain unchanged at Ba1.”

According to Moody’s, the oil shock severely weakened Nigeria’s public finances, with general government revenues suffering a 50 per cent decline between 2014 and 2016 (from 10.5% of GDP to 5.3% respectively).
It noted that the damage wrought by the oil price shock was yet to be undone by government, adding that the downgrade reflected Moody’s view that the weakness in Nigeria’s public finances would remain for some years to come.

“Moody’s forecasts general government revenue to average only 6.4 per cent of GDP over 2017-2019, the lowest level of any sovereign rated by Moody’s.

“The results of the authorities’ efforts to increase non-oil revenue since late 2015, which have focused on improving compliance and broadening the tax base, have been limited and negatively impacted by a contractionary environment in 2016.

“The Federal Revenue Inland Service (FRIS) has been able to increase non-oil revenue by 15 per cent in nominal terms as of September 2017 compared to 2016, but this is at a pace that is below nominal GDP growth.
“Meanwhile, the independent re-appropriation of revenues from the ministries, departments and agencies (MDAs) has yielded less than projected results for two consecutive years, highlighting the considerable execution risks inherent in the transition to a less oil-dependent budget.

“Hence, while the rebound in the oil price and in oil production has led to oil revenues out performing the 2017 budget target, non-oil tax revenues are still below target with a 30 per cent shortfall for the federal government at the end of September compared to budget and likely a similar situation for states and municipalities.

“The challenges on the revenue side will negatively impact potential growth. Since 2014, the authorities have offset revenue shortfalls with large cuts in much needed capital expenditure, a trend that Moody’s expects to continue.

“In 2017 the government is likely to only match 2016 capital spending that reached N1.2 trillion (or 1.2 per cent of GDP), given the 2017 budget is expected to run on a six-month cycle (for capital expenditures only), as the 2018 budget is likely to be passed in January.

“This is less than 50 per cent of the 2017 budget for capital spending and still an insufficient level to have a meaningful impact on the large infrastructure gap that significantly constrains the country’s potential growth,” the rating agency said.

Furthermore, Moody’s stated that because of the inability to expand the country’s non-oil revenue base, the government’s balance sheet would remain exposed to further shocks.

It also stressed that deficits in the country would remain elevated and debt affordability will remain challenged, despite debt levels remaining contained.

“That exposure will persist notwithstanding the recent improvements in the economy, which are primarily cyclical and related to the strengthening in the oil sector.
“Relatedly, debt service is consuming an ever larger share of government revenue. At the federal level, debt service accounted for 38.2 per cent of total revenues by the end of June, up from 29 per cent in 2014 and 23 per cent in 2013.

“At the broader general government level, the ratio of interest payments to general government revenues peaked at just under 30 per cent in 2016, 10 percentage points above what the rating agency anticipated in December 2016 when it affirmed the previous rating of B1 and over four times higher than the B2 median of 6.6 per cent in 2017.
“Moody’s expects the ratio of interest payments to general government revenues to only slowly decline to 28.4 per cent in 2017,” it added.

PENGASSAN Kicks

But even as the federal government defended its reform initiatives and reeled out plans to boost revenue in 2018 through its partial divestment in the JV oil assets, the Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN) kicked against the planned sale.

In a statement released by PENGASSAN Wednesday, its National Public Relations Officer, Fortune Obi, urged the National Assembly to reject the plan as it has done in the past, saying it was not in the national interest.
“We will not allow the commonwealth of the country to be given away to cronies of the government all in the name of sale of the assets in the industry to fund the budget,” Obi said.

“No nation can develop, survive or feel secure after selling all its national assets.”
He added that the government should focus on other sources.

“The government should critically evaluate the assets to look at their viability and profitability. Profitable assets such as NLNG (Nigeria Liquefied Natural Gas Company) and shares in the upstream oil and gas JV operations that have become a huge revenue earner for the country and should be kept by the government for the benefit of the Nigerian majority.

“We also advise the government to endeavour to repair assets that are in a state of disrepair, but not to sell them as scrap to some opportunists in the clothes of businessmen and short-sighted politicians,” the PENGASSAN spokesperson said.

President Muhammadu Buhari had Tuesday presented the N8.612 trillion Appropriation Bill for 2018, a 16 per cent increase over N7.441 trillion 2017 budget.

The bulk of the revenue to fund the budget is expected to come from tax receipts and oil revenue, while the rest will be borrowed from external and internal sources.