Fitch affirms Nigeria at ‘BB-’ Outlook Stable

By Omoh Gabriel in Washington 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 issued 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. The 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. “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.