Moody’s says CBN naira devaluation will help the economy

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Moody’s, one of the big-three credit rating agencies in the world, says the Central Bank of Nigeria (CBN) devaluation of the naira is a positive step in building the economy.
Moody’s made the disclosure in a report released on Friday, entitled ‘Government of Nigeria: FAQ on Credit Implications of Naira Depreciation, Low Oil Price and Broader Economic Challenges’.
Godwin Emefiele, governor of the CBN, and President Muhammadu Buhari had initially insisted that the naira would not be devalued, but eventually decided to let the local currency float, which effectively devalued the naira.
“Overall, Moody’s views the recent devaluation of the naira as credit positive. The new system should enable the naira to better absorb external shocks over time, and dollar availability should gradually increase,” the report read.
“However, the depreciation implies a material loss in purchasing power given import-price inflation. Moody’s expects inflation to accelerate to 18% by year’s end, before falling to an average of 12.5% in 2017 (based on the recent 2 percentage point hike in the central bank’s policy rate to 14%).
“Moreover, the fiscal benefit of the depreciation and the current oil price (which is above the budgeted oil price) exceeds the loss in oil output.
“States and local governments will benefit from the naira depreciation, offsetting the negative impact on oil production from the recent attacks in the Niger Delta. Moody’s expects authorities to reduce spending if revenues underperform.”
While Nigeria’s government should comfortably meet its financing gap over the next 12 to 18 months, Moody’s Investors Service report published on Friday says increasing liquidity pressures, rising inflation and stagnant growth pose key challenges.
“The Government of Nigeria (B1 stable) continues to face low oil prices, volatile oil production, a spike in inflation that has eroded purchasing power, foreign exchange scarcity and an economy that has entered technical recession.
Moody’s projects stagnation in real GDP in 2016, stating that the country will get out of recession in 2017, with a “subdued growth at 2.5% in 2017”.
“We expect that Nigeria will contain pressures on its public finances in the short term. However, there is greater doubt about the severity of the impact of these challenges, particularly on government liquidity and economic growth, over the medium term,” says Aurelien Mali, a VP-Senior credit officer at Moody’s.
The rating agency expects that the depreciation will increase Nigeria’s external debt marginally to 5.2% of GDP by end-2016 from 3.3% in 2015.
Moody’s fiscal outlook for Nigeria’s general government’s fiscal position has not materially changed since April. The rating agency expects it to remain in deficit at around 3.7% of GDP in 2016, after posting a 3.8% deficit in 2015.
Meanwhile, CBN has sent strong signals to the market that it will prioritise stemming inflation over promoting growth, as well as supporting the return of foreign capital.


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