Akwa Ibom (AK) state’s Long-Term foreign and local currency ratings has been given a positive mark by Fitch Ratings from a step up from its previous Stable position and affirmed the ratings at ‘B+’. The rating agency has simultaneously affirmed the National Rating at ‘AA-(nga)’, with Stable Outlook.
The Outlook revision reflects the subsiding restiveness in the Niger Delta region and buoyant market oil prices resulting in resilient oil-related revenues offsetting growing operating costs amid weak socio-economic indicators by international standards. The ratings could be upgraded if budgetary performance remains strong, in line with Fitch’s expectations and improving financial disclosure. Budgetary performances weakening beyond Fitch’s expectations and/or a resurgence of local unrest undermining oil-revenue generation could lead to a revision of the Outlook to Stable or a downgrade.
The state continues to perform in line with Fitch’s expectations with an operating balance of around NGN175bn, or about 75 per cent of revenue. In Fitch’s base case scenario, the operating margin should stabilise over the medium term, supported by resilient oil revenues and efforts to develop taxes while tackling operating cost pressures, and remain around N125billion, or 50 per cent of the annual revenue, if prices were to fall towards $50/pb.
Fitch expects oil-related revenues to continue to account for about 90 per cent of Akwa Ibom’s income. While this facilitates budgetary projections, the state remains vulnerable to swings in oil prices. The discontinuation of excess crude account (ECA) revenues, which averaged about 25 per cent of income over 2008-11, is being offset by the partial removal of the subsidy on fuel import, which could account for up to N20billion. The stabilisation of oil extraction could translate into oil revenue of N230billion by 2014 from N200billion in 2011.
By increasing tax rates and land use charges and authenticating the tax payers’ database, the administration expects to boost monthly local taxes to N2billion in 2012 from N1.2billion in 2011. Although the eventual re-direction of oil companies to pay taxes in AK instead of where they are officially headquartered may further boost revenues, Fitch expects growth to be more gradual with internally generated revenue (IGR) reaching NGN2bn a month by 2014, but not representing more than 10 per cent of annual income.
The implementation of the national N18, 000 monthly minimum wage will likely raise the wage bill to about N30billion in 2014, up 50 per cent from 2011. Rising energy costs could lead to staff demanding higher salaries to tackle the growing cost of living. In Fitch’s opinion, the state operating costs are likely to continue to grow by about 50 per cent, to N70billionn over the medium term, driven by service delivery such as health and education.
