FCH-Fitch Revises Nigeria’s Outlook to Negative; Affirms ‘BB-‘


(Fitch) Fitch Ratings has revised Nigeria’s rating Outlooks to Negative from Stable. At the same time its ratings have been affirmed at Long-term foreign currency Issuer Default (IDR) ‘BB-‘, Long-term local currency IDR ‘BB’, short term foreign currency IDR ‘B’ and Country Ceiling ‘BB-‘.


“The Outlook revision reflects the weakening of the institutional framework of fiscal management of oil revenue by continuing withdrawals from the Excess Crude Account (ECA). The depletion of the ECA and continued gradual fall in international reserves at a time of high oil prices and record high oil production is a major concern. It also raises vulnerability to any renewed fall in oil prices and threatens macroeconomic stability” says Veronica Kalema, a Director in the Middle East and Africa Sovereign team. “While there are plans to remedy the situation through the establishment of a sovereign wealth fund which will be governed by more robust prudential guidelines, and removal of the fuel subsidy currently taken out of the ECA, implementing these will be challenging before elections expected in April next year.”


In addition, elections in the first half of next year have increased short-term political uncertainty. Political risk has been heightened by the end of the zoning agreement within the ruling Peoples Democratic Party (PDP) under which power rotates from the south to the north every two terms. This could give rise to instability in the Niger Delta (ND) or in the northern states, depending on who the PDP chooses as its candidate. A flare-up in the ND would be the worst outcome for the economy as a whole as it would likely bring a renewed decline in oil output, budget revenues and international reserves.


The major constraints on the ratings – low per capita income, weak transparency and governance and the infrastructure deficit, especially the power shortage – remain in place. A blueprint to address the power shortage was finally unveiled in August 2010, which will involve the privatisation of the state-owned power company and increased participation by the private sector in power generation, but there is unlikely to be much progress until after the 2011 elections. The huge infrastructure gap in all areas including roads, railways and waterways is a medium- to long term constraint on development and the ratings.


Fitch adds, however, that Nigeria’s ratings remain supported by robust non-oil sector growth, low public and external debt ratios and a net external creditor position still much stronger than rated peers despite weakening during the global economic crisis in 2009. The recovery of oil production as a result of the ND amnesty in Q409, and renewed reform momentum in 2010, also support the ratings.


In addition central bank policies towards the banking sector over the past year have been supportive of the ratings. The liquidity squeeze has eased, transparency regarding asset quality has increased and confidence in the banking sector has stabilised, although credit remains constrained. Concerned about inflationary pressures due to excess liquidity, the Central Bank of Nigeria has also recently started to tighten monetary policy.


A ‘bad bank’, AMCON, soon to be operational, will remove toxic assets from banks’ balance sheets and improve capitalisation. Gross AMCON costs could amount to approximately 10% of GDP, but the net cost after recoveries and funding from the levy on all banks will be less. Fitch views ongoing banking and capital market reforms, albeit triggered by a crisis, as ultimately positive for the ratings. Although institutional and structural factors are weaknesses for the public finances, the public debt ratio is low and was hardly affected by the crisis. Costs arising from AMCON and other contingent liabilities would still leave debt ratios comfortably below rated peers.


The current economic team and eventual new government will have to undertake key institutional and structural reforms to return the Outlook to Stable. These include a fully operational SWF with safeguards shielding it from the election cycle and political pressures in general; removal of the fuel subsidy, which would assist in rebuilding the stabilisation fund and encourage investment in downstream petroleum; and reforms that would encourage infrastructure investment necessary for economic diversification, sustaining non-oil sector growth and raising per capita incomes. Further improvements in data quality and transparency would also benefit the ratings. A sustained fall in oil prices continued dwindling of reserves and heightened political risk are the likely main source of downward pressure on the ratings.


(Source: Reuters)

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