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N2.2trn undisclosed debt increases Nigeria’s risk profile

EARLIER this month, the Nigerian government announced, via its Twitter page (@AsoRock), that it had found NGN2.2trn ($7bn) of previously unrecorded debt on its books. The full amount of this debt, which is owed to private sector organisations, is being blamed on the previous administration.

The government has claimed that the discovery was made due to an ongoing change in its accounting practices, as it transitions from cash accounting to accrual accounting.

This change in system is being made to move Nigeria in line with the International Public Sector Accounting Standards (IPSAS), promoting transparency and accountability in public sector financing and tackling corruption.

The revelation was made only days after Moody’s affirmed Nigeria’s credit rating at B1 with a stable outlook.

The ratings agency cited the country’s strong balance sheet relative to its peers, and its robust medium-term growth prospects as the key drivers for its ratings decision, on 9 December.

Moody’s rating and its rationale would have likely improved investor sentiment towards Nigeria, following three consecutive quarters of economic contraction – the country is in the midst of a recession, having recorded growth rates of -0.4 percent year on year (y/y) in Q1 2016, followed by -2.1 percent y/y and -2.2 percent y/y in Q2 and Q3, respectively.

Analysts compare the disclosure with a similar occurrence in Mozambique earlier this year.  ‘The discovery is mildly reminiscent of the revelation of previously undisclosed government debts in Mozambique earlier this year,’ said an analyst at Ecobank.

The Mozambican government admitted, in April, to have hidden $1.4bn (later revised to more than $2bn) in external debts from investors and the IMF. The disclosure led to the suspension of aid from a host of multilateral and bilateral donors.  Mozambique declared a state of debt distress in October 2016.

But analysts say Nigeria’s situation is unlikely to be as dire as that of Mozambique. The new debt discovered in Nigeria account for roughly 2.3 percent of GDP.

In Moody’s statement (before Nigeria’s debt disclosure) the agency noted that Nigeria’s total debt-to-GDP ratio (16.6 percent) will remain well below the expected median of 55 percent for B1-rated countries.

Adding the newly disclosed debts takes that debt-to-GDP ratio to roughly 19 percent, which still presents a low risk of debt distress and still well below the 55 percent median for countries of the same rating.

Still, the recent announcement is likely to have a negative impact on investor sentiment, undermining any gains made by Moody’s affirmation, analysts say.

Investors are likely to be concerned about the potential for the revelation of more undisclosed debt, especially given still weak oil receipts and FDI and portfolio inflows.

Such concerns would push up Nigeria’s yields, increasing the government’s debt-servicing costs against a backdrop of weak oil prices, and high government spending plans.



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