A combination of improved external reserve accretion, stable exchange rate and the sustained retention of inflation figure at a single digit rate at the weekend put Nigeria’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and ‘BB’ respectively by Fitch Ratings, a global rating agency.
A statement from the London office of the agency described the Nigerian economic outlook as stable, adding that the issue ratings on Nigeria’s senior unsecured foreign currency bonds have been affirmed at ‘BB-‘.
The country ceiling has been affirmed at ‘BB-‘ and the Short-term foreign currency IDR at ‘B’.
Explaining the basis for the positive rating, the statement from the agency said, “The affirmation and Stable Outlook reflects the following key rating drivers: Reserves have been rebuilt modestly to $39.5billion at end-September, owing to a strengthened balance of payments and a rise in the Excess Crude Account (ECA; a fiscal buffer), after a sharp drop from their May 2013 peak of $48.9billion.”
The implication, according to Fitch is that “Coverage of current external payments (CXP) remains above the peer median at around 5.5 months. The exchange rate has been stable and inflation has remained in high single digits.”
It pointed out that the estimated general government budget deficit of 2.7 per cent of GDP in 2013 is small and in line with the peer median, but slightly worse than other similar-rated oil exporters.
The report noted that spending at the subnational level is less controlled and transparent than at the federal government level, where there is a deficit rule. The absence of comprehensive general government accounts, it said, complicates assessments of fiscal performance. It also noted that non-oil revenues are low.
Fitch said the federal government budget outperformed over 1H14 despite pressure for spending ahead of the February 2015 elections. A deficit of N325billion (0.4 per cent of Fitch-forecast 2014 GDP) was recorded in 1H, roughly one-third less than the target on a pro-rata basis and the deficit in 1H13.
Fitch expects some over-spending at the subnational level, but it feared this will be constrained by improved financial management and the low level of the Excess Crude Account ($4.1billion at end-August, up from $2.3billion at end-2013).
Reduced disruption to oil supply and government efforts to lift non-oil revenues and improve public finance management lead Fitch to forecast a general government deficit of around one per cent of GDP in 2015 and 2016.
The report also stated that public and external debt ratios were stable and low compared with peers on a net and gross basis.
“General government debt was 12.5 per cent of GDP and gross external debt was 9.7 per cent of GDP at end-2013. Debt is well managed. There is a diverse local investor base and local currency debt is in key global bond indices. A recent issue of Ireland-listed global depository notes further broadened foreign holdings of naira-denominated federal government debt. Debt service ratios are also low,” the report said.
As a mark of confidence in the Nigerian economy, Fitch’s debt sustainability analysis shows the debt ratio would remain well below the ‘BB’ median in any plausible scenario. The agency said Nigeria’s economic growth is robust, although slightly less than previously estimated after national accounts rebasing.
According to the rating agency, real GDP growth averaged 6.1 per cent over the past five years and was 6.4 per cent in 1H14. It explained that non-oil growth has outperformed headline growth due to reforms and rising incomes, adding, however, that disruption to output has held back the oil sector, although it grew in 2Q14, the first growth in nearly two years.
Consequently, Fitch forecasts growth of 6 per cent-7 per cent each year to 2016, led by the non-oil sector, as the impact of key reforms broadens.
As power and agriculture reforms have continued to progress, Fitch believed the government is tackling the issues affecting operators after the privatisation of generation and distribution companies in late 2013. It also noted that the delayed sale of integrated power projects is at an advanced stage.
“The introduction of an electronic registration scheme allowed the proportion of farmers receiving subsidised fertiliser to jump to 80 per cent in 2013 from 11 per cent prior to 2011. However, there has yet to be a sustained pick up in power supply and agricultural output is being hit by Boko Haram activity in the north east. With momentum expected to continue after the elections, the reforms should yield notable benefits,” the report said.
The agency, which noted that the Petroleum Industry Bill remains stalled in the legislature, said the development was seriously hampering oil sector investment. Nigeria, the report stated, scores weakly on the World Bank measure of political stability, saying the Boko Haram insurgency has worsened and is causing serious disruption to economic activity in parts of the north east.
Regretting the decline in Nigeria’s current account surplus, the report said “Nigeria is a net external creditor, in contrast to the ‘BB’ median, and has posted a current account surplus every year since 1998. However, the current account surplus has been declining (4.1 per cent of GDP in 2013) and may be overstated given large negative errors and omissions. FDI is less than one per cent of GDP, among the lowest in sub-Saharan Africa.
“Nigeria’s ratings are constrained by weak governance, as measured by the World Bank, low human development and business environment indicators and per capita income, and a heavy reliance on oil revenues (around 70 per cent of fiscal revenues and 75 per cent of current external receipts). Nigeria has the world’s 10th-largest oil reserves but reserves and production are low in per capita terms,” the report said.
Although Fitch does not anticipate developments with a high likelihood of leading to a rating change, it however pointed out that the main factors that, individually or collectively, could lead to positive rating action are: – Accelerated structural reforms that bring faster, more inclusive growth. – Strengthened external buffers, either in the ECA/international reserves or the sovereign wealth fund. – A prolonged period of inflation closer to the peer median (currently 5.1 per cent). – Improved governance as reflected in World Bank and anti-corruption indicators.
“Fitch forecasts Brent crude to average $105/b in 2014, $100/b in 2015 and $95/b in 2016. Fitch assumes the current stance of relatively conservative macro policy and incremental structural reform will remain in place. Economic policy has not featured in pre-election rhetoric and there appears little substantive difference between the leading parties. Fitch expects the forthcoming elections to be keenly contested. Some violence is likely and there will be significant political noise. However, the election process is assumed to be completed successfully,” the report stated.