Fitch Ratings has affirmed Nigeria's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' and 'BB' respectively with a Stable Outlook. The agency has also affirmed Nigeria's Short-term foreign currency IDR at 'B'. The Country Ceiling has been affirmed at 'BB-'.
Fitch affirmation reflects progress on a number of fronts including a tighter fiscal stance, an improvement in electricity supply, increased agricultural output which has helped reduce imports, and an increase in international reserves. Nonetheless, the reinvigoration of structural reforms has yet to feed through to a higher growth rate and weaknesses including a vulnerability to oil price shocks, high inflation and governance challenges weigh on the rating.
The partial elimination of the petroleum subsidy in January sent a strong message about the government's reformist intentions. Although the move did not go as far as originally planned, it is an important step in the right direction.
Moreover, the political furore it prompted paved the way for a clean-up of the subsidy payment system and crack down on the inefficiencies and fraud that have been uncovered. This has brought important gains to government revenues and international reserves, including the Excess Crude Account (ECA) which has risen to USD8bn this year.
The reforms have yet to have a noticeable impact on GDP growth. Growth has slowed this year, averaging 6.2% in H112, compared to an average 7.4% in
2009-2011. Fitch believes the slowdown is temporary, affected by security and weather problems which have particularly affected agriculture. A recovery to 7% or more should be possible next year. However, there is no sign yet that growth is moving to a higher plain, which should happen as the reforms take hold. The banking system is also still convalescing, with credit growth barely positive in real terms due to high interest rates, limited lending opportunities and improved risk management.
SWF tension hinders S&P rating
Meanwhile, Nigeria's chance of a rating upgrade is being hindered by a lack of clarity over how its sovereign wealth fund will grow amid tensions with regional governments over revenue allocation, Standard & Poor's said.
Increasing the size of the fund from its initial $1 billion is key to building up external buffers that are needed for an upgrade in the B+ rating of Africa's biggest oil producer, Christian Esters, a sovereign analyst at S&P, said in a phone interview yesterday from Frankfurt.
"I don't think currently we have visibility about how quickly this new sovereign wealth fund will grow, it continues to be a challenge for the federal government to convince the state to get them on board and to convince them what the advantages would be," Esters added.
He maintained that Nigeria is trying to set up something that is more independent from day to day vagaries of politics and more independent from the regional states wanting to tap the fund, which is the case for the excess crude account.
Esters said, one of the triggers for an upgrade is fiscal and external buffers in the form of reserve against the dependence on oil revenue, adding that reserves have increased, but will still need to see some track record in the light of high oil prices.
Standard and Poor's rate its outlook on Nigeria's credit rating four step below investment grade to positive from stable on December 29, indicating a possible upgrade if the government follows through with plans to boost the economy and savings.
Vanguard Nigeria