Nigeria’s economy should be relatively stable over the next year, according to an international rating agency, as it recovers from problems created by the decline in oil prices over the past few years.
Nigeria has a stable financial outlook for the next 12 to 18 months, according to international rating agency Moody’s, following a difficult period in which the country has had to contend with nearly three years of low oil prices. In a report, the agency said the country’s GDP will grow, and dollar shortages should ease over time, though there will still be issues with loans and liquidity.
“With oil prices and economic activity gradually recovering in Nigeria, we expect banks’ dollar liquidity pressures to gradually ease over our outlook period,” said Akin Majekodunmi, a vice-president, and senior analyst, in a statement.
Despite this, it was not all positive news: “However, we expect asset quality to worsen slightly over the outlook period, as historically low oil prices, currency depreciation and economic contraction experienced in 2016 continue to generate new non-performing loans in 2017,” added Majekodunmi in the report, Banking System Outlook: Nigeria.
In the report, Moody’s predicts that Nigeria’s GDP will increase by 2.5% this year, increasing to 4% in 2018, having dropped by 1.5% in 2016.
However, it also predicted an increase in non-performing loans to between 14% and 16%, although this should peak in 2017 and then drop off, and equity to decline slightly.
The performance of loans was attributable to the effect of oil prices, currency depreciation and Nigeria’s poor economic performance in 2016, the report said.
Banks’ net profitability will also suffer a little, with Moody’s expecting return on assets to drop to around 1%, down from 1.3% last year, but the agency was confident that the government would support any banks that got into trouble “given the significant consequences of a bank collapse to both the payments system and the wider economy”.
Nigeria’s rating – already in ‘junk’ status – was further downgraded in 2016 by Standard & Poor’s late last year, in response to the oil price and foreign currency shortages.
That was echoed by the downgrading of the continent’s other major economies, South Africa, to junk in April by S&P and Fitch Group, while Moody’s announced its intention to review the country’s status.
These drastic measures came despite a concerted lobbying effort from government ministers and were in response to the sacking of well-regarded finance minister Pravin Gordhan on 30 March by President Jacob Zuma, due to a political dispute.
The dismissal of Gordhan immediately produced a 5% drop in the value of the rand.
Nigeria is ranked 36 out of 54 African countries for overall governance by the Mo Ibrahim Foundation, in the 10th-anniversary edition of the Ibrahim Index of African Governance, published in October last year. The index ranked it as 44th for safety and rule of law, 26th for participation and human rights, 34th for sustainable economic opportunity and 38th for human development.
An annual global mergers and acquisitions (M&A) trends report from international law firm Clifford Chance, published earlier this year, noted a shift in African deal-making from West to East Africa, highlighting Nigeria’s struggles with the oil price and foreign exchange.
There are other positive signs in foreign investment though, with Nigeria expecting USD 40 billion in new Chinese investment, on top of an existing USD 45 billion, in coming years.