Moody’s: Nigeria Has Less Flexibility to Cut Spending

While most Sub-Saharan African (SSA) sovereigns plan to consolidate their budgets to stabilise debt, they are now more vulnerable to potential negative economic and financing because they are in a weaker fiscal position than five years ago, Moody’s Investors Service said in a report Thursday.

The report which analysed the situation in some African countries, stated that, “Nigeria and Gabon have relatively less flexibility to cut spending; in Nigeria, we capture only spending at the federal government level, where interest makes up a relatively large share of total spending, while the relatively low degree of spending flexibility reflects past fiscal consolidation which was skewed toward discretionary spending.

“In Gabon, less flexibility to cut spending today reflects the composition of past fiscal consolidation.”

According to the global credit rating agency, in the event of shocks, spending flexibility – defined as countries’ scope to cut government spending rapidly and significantly – allows sovereigns to broadly adhere to their plans and lends resiliency to fiscal strength.

“Expenditure cuts are often less complex to implement quickly than revenue-raising measures,” Moody’s Vice President, Senior Analyst and the report’s co-author, David Rogovic said.

“The credit risks associated with lack of spending flexibility are most pronounced where it coincides with higher debt burdens and for those whose fiscal metrics are more vulnerable to shocks.”

Based on Moody’s assessment of the proportion of mandatory spending relative to the regional average, Cameroon and Cote d’Ivoire have the most flexible spending structures.

The report noted that higher-than-average spending flexibility in Rwanda and Cameroon mitigates some of the risks associated with a rising government debt burden, if governments were willing and able to use that flexibility in the face of a shock.

By contrast, mandatory spending accounts for over 80 per cent of total spending in Namibia, Mauritius, South Africa and Ghana, the report stated.

For Namibia and Ghana, rigid expenditure combines with other fiscal weaknesses to increase pressure from shocks on their fiscal strength and credit profiles.

“While spending flexibility does not solely drive our assessments of fiscal strength, greater flexibility raises confidence in the stability of fiscal strength through economic and financing cycles.

“The credit implications of spending structures are most relevant for sovereigns with already weak fiscal strength assessments, or those sovereigns whose fiscal metrics are more vulnerable to shocks,” the report added.