Fitch Ratings, a UK based rating firm has re-affirmed Nigeria’s Long-term foreign and local currency debt repayment default (IDR) at ‘BB-‘ and ‘BB’, respectively. The Outlooks of the Nigerian economy and chances of defaulting in debt repayment they said are Stable.
According to the Rating Agency report released yesterday in London “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-‘.
Fitch rating is coming on the heels of Nigeria’s GDP rebasing and has a mixed impact on key sovereign rating metrics, and therefore no automatic implications for Nigeria’s BB-/Stable sovereign rating. The GDP uplift affects some key rating metrics positively and some negatively. 2013 per capita GDP rises by 89 per cent to $2,900 on Fitch’s calculations. But it remains below both the ‘BB’ and ‘B’ category peer group medians of $4,528 and $3,841, respectively.
It is also below similarly rated oil exporters Gabon (USD10,688) and Angola (USD 5,703).
Per capita GDP ranking relative to other countries is more important in our sovereign rating methodology than the absolute level. Nigeria overtakes just three Fitch-rated sovereigns – Vietnam (B+), Philippines (BBB-) and Bolivia (BB-) – following the uplift. The other main positive impact is on public debt indicators, which are already a rating strength and now look even stronger. 2013 debt-to-GDP drops to 11.6% from 22% and the average deficit-to-GDP ratio is just 1.4% over the past three years (both calculated on a general government basis). However, Nigeria’s low non-oil fiscal revenue now looks even lower at just 3.8% of GDP (2013 Fitch estimate).
The GDP uplift puts some other key metrics in a poorer light. The 2013 current account surplus shrinks to 4.1% of GDP (and is likely to be overstated given the large errors and omissions in the balance of payments). Foreign direct investment drops to less than 1% of GDP, among the lowest in the region. Broad money – a proxy for financial market development and banking sector penetration – also declines, from one-third of GDP to less than one-fifth of GDP.
So the rebasing exercise itself has no rating impact overall. Nevertheless, the results are likely to be credit positive in the longer term as perceptions of Nigeria as an investment destination improve. The rebasing also highlights the importance of data quality, which is taken into account in the rating process.
The NBS early in the Month released the results of a major overhaul and update of Nigeria’s national accounts, including shifting the base year forward by 20 years to 2010. This allows the better capture of a number of economic sectors which have appeared over this period. This uplift raises Nigerian GDP in USD terms in 2013 to USD504bn on Fitch calculations, making it the largest economy in Africa, and the 26th-largest in the world on World Bank calculations. Contact:
The affirmation reflects the following key rating drivers:
Fitch ratings said that “The foreign exchange market and international reserves are stabilising after the shock of central bank (CBN) governor Sanusi’s suspension on 20 February. Demand for foreign exchange 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 3% band.
“Official reserves rose in March, helped by an increase in the ECA fiscal buffer (Excess Crude Account). 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 end 2014, although weaker than similarly rated oil exporters (Angola and Gabon).
It said that 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 15 per cent. Inflation fell to a new low of 7.7 per cent in February, within the target range of 6-9 per cent. 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.
Oil production remains volatile but rose in 1Q14 to average 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 has gained heightened prominence this year and the President has agreed to a forensic audit of the flows between state-owned oil company NNPC and the budget.
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 the rating agency said include:
Nigeria’s low debt burden, which after the recent GDP re-basing is just 12.6 per cent of GDP (general government) at end-2013, is well below medians throughout the rating scale. Fitch’s debt sustainability analysis shows the debt ratio would remain well below the ‘BB’ median in any plausible scenario.
Continued strong growth, which has averaged 6.8 per cent over the past five years, led by non-oil growth of an average 7.7 per cent. Revised national accounts show growth accelerated to 7.4 per cent in 2013, with a 5.2 per cent 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 per cent of GDP and services now put at 52 per cent of GDP (previously 29 per cent) 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 Fitch said.
However, it said that the current surplus has been declining (4.1% of GDP in 2013) and may be overstated given large errors and omissions. FDI is less than 1 per cent 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.
Nigeria’s ratings are constrained by weak governance, as measured by the World Bank, low per capita income, even after the 89% 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.
It said “The main factors that individually or collectively might lead to rating action are as follows: 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); improved governance as reflected in World Bank and anti-corruption indicators”.
It further said “Renewed pressure on reserves that further depletes 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”.
Fitch said that “Nigeria is highly dependent on oil for fiscal and external revenue and assumes Brent crude will average $105/bl in 2014 and $100/bl 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 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 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.
