Fitch BB- Rating for Nigeria

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Ngozi Okonjo-Iweala, minister of finance

Fitch, a respected international rating agency, has affirmed that Nigeria’s economy is stable giving it a ‘BB-’ rating

By Maureen Chigbo  |  Apr. 21, 2014 @ 01:00 GMT

DESPITE being listed as one of the countries where extreme poverty persists, Nigeria’s economy has been witnessing some good news recently. Barely two weeks after the country’s rebased GDP ranked it the 26th largest economy in the world, Fitch, a respected international rating agency, has also retained Nigeria’s robust sovereign rating. On April 10, the agency cited a more diversified economy confirmed by the GDP rebasing, improving stability  in the economy after the leadership change in the Central Bank of Nigeria, increase in excess crude account, tight 2014 budget, low debt burden, strong growth,  increasing oil production  and improved efforts to tackle pipeline vandalism to affirm its ‘BB-’ rating of Nigeria with a stable outlook to demonstrate its view that the country is on the right economic trajectory despite its many challenges.

“Fitch Ratings has affirmed Nigeria’s long-term foreign and local currency Issuer Default Ratings, IDR at ‘BB-’ and ‘BB’, respectively. The outlooks are stable. The issue ratings on Nigeria’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BB-’ and ‘BB’, respectively. The agency has also affirmed Nigeria’s short-term foreign currency IDR at ‘B’ and Country Ceiling at ‘BB’,” a statement from the agency said.

“The affirmation reflects the following key rating drivers: the foreign exchange market and international reserves are stabilising after the shock of Central Bank of Nigeria, CBN, Governor Sanusi’s suspension on 20 February. Demand for forex in the official auction reverted to normal levels in March and CBN intervention in the inter-bank market has fallen away. The inter-bank naira/US dollar rate has strengthened from its lows although it remains outside the upper limit of the 155 plus or minus three percent band,” it said.

According to Fitch, “Official reserves rose in March, helped by an increase in the Excess Crude Account, ECA, fiscal buffer. Although reserves have fallen appreciably over the past year, they remain in line with ‘BB’ category peer medians at a Fitch projected 4.6 months’ current account payments, CXP, at the end of 2014, although weaker than similarly rated oil exporter (Angola and Gabon).

“On 25 March, the Monetary Policy Committee continued the gradual tightening of liquidity seen over the past year, with an increase in the private sector cash reserve requirement to 15percent. Inflation fell to a new low of 7.7 percent in February, within the target range of 6 – 9 percent. Fitch believes that as an institution, the CBN has been strengthened in recent years and should retain its autonomy over monetary and financial policy, notwithstanding the suspension of the former governor.”

It said that oil production remains volatile but rose in the first quarter of 2014 to average at 2.25mb/d, in line with the trailing 12-month average, and above the recent low of 2.1mb/d in November/December 2013. Improved production and increased efforts to tackle pipeline vandalism and oil theft may help explain the increase in the ECA in March. The issue of corruption in the oil sector and lack of transparency in oil flows have gained heightened prominence this year and the president has agreed to a forensic audit of the flows between the state-owned oil company, NNPC, and the budget, Fitch said.

“A tight budget has been approved. It assumes a conservative oil price of USD77.5/bl and a more realistic oil production assumption of 2.39mb/d. Although production shortfalls are likely to continue, allowing further drawing on the ECA, the authorities aim to increase the ECA this year. The budget envisages a fall in revenue and spending, although the latter will be achieved mainly through a more realistic assessment of capital spending capacity.”

Other factors supportive of the affirmation include Nigeria’s low debt burden, which, after the recent GDP re-basing is just 12.6 percent of the GDP at the end of 2013, is well below medians throughout the rating scale. Fitch’s debt sustainability analysis shows that the debt ratio would remain well below the ‘BB’ median in any plausible scenario.

Also there has been continued strong growth, which has averaged 6.8 percent over the past five years, led by non-oil growth of an average 7.7 percent. Revised national accounts show growth accelerated to 7.4 percent in 2013, with a 5.2 percent increase in the energy sector as gas production increased, notwithstanding a fall in oil production. The GDP rebasing shows a more diversified economy, with the non-oil sector comprising 86 percent of GDP and services now put at 52 percent of GDP (previously 29 percent) with the oil and agriculture sectors now having a reduced share in GDP.

Nigeria’s sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than ‘BB’ category medians. However, the current surplus has been declining (4.1 percent of GDP in 2013) and may be overstated given large errors and omissions. FDI is less than one percent of GDP, amongst the lowest in the region.

“Reform progress remains mixed. Electricity generators and distributors are now in private hands but transmission remains a problem and output remains volatile, affected by gas supply and other problems. Agricultural reforms continue to gain traction, leading to higher output and a reduced import bill. However, the Petroleum Industry Bill, PIB, remains stalled. Strong vested interests make structural reform a continual struggle, Fitch said.

“Nigeria’s ratings are constrained by weak governance as measured by the World Bank, low per capita income, even after the 89 percent uplift to 2013 GDP due to rebasing, and vulnerability of public finances and reserves to oil price volatility. Political noise has increased this year ahead of the February 2015 presidential and gubernatorial elections. The Boko Haram insurgency has also intensified this year, though is geographically contained.”

The main factors that individually or collectively might lead to positive rating action are accelerated structural reforms that bring faster, more inclusive growth and higher employment and per capita incomes, signs of a sustained increase in electricity production and passage of the PIB would be especially positive; a longer track record of low single-digit inflation, improved external buffers, either in the ECA or the new Sovereign Wealth Fund, NSIA and improved governance as reflected in the World Bank and anti-corruption indicators.

The factors responsible for negative rating are renewed pressure on reserves that further deplete Nigeria’s fiscal and external buffers, reversal of key structural reforms, a serious deterioration in domestic security, whether stemming from terrorism or election-related violence.

One of the assumptions underlying the ratings is that Nigeria is highly dependent on oil for fiscal and external revenue. Fitch assumes Brent crude will average $105 per barrel in 2014 and $100 per barrel in 2015.

Fitch assumes the current stance of relatively conservative macro policy and incremental structural reform will remain in place in the forecast period, which goes up to the election year of 2015. In particular, no significant fiscal spending overruns are assumed. At the same time, no significant acceleration in non-oil growth or net exports has been assumed nor any further reduction in petroleum subsidies, which would benefit public and external finances.

Fitch believes the passage of the PIB before the election is unlikely, but failure to do so is assumed not to have any serious short-term impact on oil production. However, oil theft and associated capacity shutdowns are assumed to continue, although not worsen, meaning average oil output will remain around 2.2mb/d, significantly below the potential of 2.5mb/d. It is also assumed that there is no major resurgence of violence in the Delta region.

The Boko Haram terrorist insurgency is assumed to remain contained and not to have serious consequences for economic performance.

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