Why JP Morgan thinks the Nigerian economy is risky

Every month, Nigerian state governors assemble at the Federal Capital Territory (Abuja) to get their share of the national cake from the Federal Accounts Allocation Committee (FAAC). 

In Nigeria, this is how most state governments are funded.

In the past, we have covered how government revenue is shared, but here’s the recap: revenue generated from various sources like oil exports, statutory payments, value-added tax (VAT), company income tax (CIT), import and excise duty, petroleum profit tax (PPT) etc., is paid into the Federation Account and disbursed to various state governments. Put simply, money made in April is shared for state obligations like salary payments and infrastructure projects in May.  

While the sharing formula might raise some eyebrows because of who gets what and why (remember the VAT hassle last year), an essential source of revenue to the Federation Account has been a significant cause for concern—NNPC remittance. 

As Nigeria’s fuel subsidy payments rise with oil prices, the country struggles to meet oil production targets. This has caused the NNPC’s cut back on its monthly contributions to the FAAC. According to the latest Organisation of Petroleum Exporting Countries (OPEC) report, our oil production levels declined to 1.32 million barrels per day (mmbpd) in April compared to our OPEC quota of 1.72 mmbpd. Since the oil price crash in 2020, OPEC and its allies, including Russia, decided to assign member countries monthly oil production targets (quotas) to control oil supply and monitor oil prices. For context, Nigeria has an oil output potential of 2 mmbpd, and in the revised 2022 budget, our production estimate is 1.6mmbpd. However, we keep struggling with oil production due to theft and vandalism. Essentially, Nigeria is selling less crude and earning less revenue. 

With the NNPC subsidising fuel to keep the retail price of petrol at ₦162 per litre despite higher oil prices, something has to give (its FAAC remittance). This brings us to our current position—between January and March 2022, the NNPC has not contributed to FAAC. 

This zero remittance by the NNPC was why JP Morgan downgraded Nigeria to 'market weight' from 'overweight' in its emerging market sovereign recommendations list on May 11. The JP Morgan “Sovereign List” guides investors on which emerging market bonds they should buy and the risk involved in purchasing the bonds. An overweight rating means that a country’s assets (bonds) are less risky and expected to deliver more returns than other emerging economies. A market weight rating is the opposite, as other countries’ assets are more attractive to investors. We will unpack this shortly. 

As JP Morgan said, “Nigeria's fiscal woes amid a worsening global risk backdrop have raised