In a presentation on Nigeria’s Debt Capital Markets, Richard Fox, Fitch Ratings’ Head of Africa/Middle East sovereigns, on Tuesday compares Nigeria’s current sovereign debt metrics to those of Emerging Markets (EMs) that have recently made the transition to investment grade (IG).
Since 2004, seven EMs have moved up the rating scale from Nigeria’s current ‘BB-‘ level to the lowest investment grade ‘BBB-‘ rating.
The most recent was Indonesia in 2011; the others are Azerbaijan (2010), Brazil (2008) and Bulgaria, Kazakhstan, Romania and Russia (2004).
Of the seven, four are oil producers to varying degrees. The three notch upward movement has typically taken between six and eight years, which makes it a plausible ambition for Nigeria in the context of its Vision 2020.
Nigeria’s growth challenges
Among the key indicators that Fitch uses to assess sovereign creditworthiness, three stand out as being well outside the range of experience of recent newly IG EMs: per capita GDP, reserve cover and governance (the latter measured by the World Bank’s governance indicators).
These areas represent Nigeria’s biggest challenge to improving its rating, as highlighted in Fitch’s previous research.
Of the three, reserve cover is the most susceptible to rapid improvement, particularly at current high oil prices. But although Nigeria’s reserves have risen by around US$2 billion this year, they are not rising as fast as in the majority of big oil exporters.
Other external data such as the current account and net external assets are comparable to those of newly IG sovereigns. The exception is commodity dependence, reflecting the dominance of oil revenues. Although some newly IG oil exporters have had even higher oil dependence, this has been compensated by a stronger international reserves cushion against oil shocks.
Part of the explanation for the improved trend of reserves this year is the authorities’ actions to reduce FX demand for refined petroleum imports, including the partial reduction in the petroleum subsidy earlier this year.
The reduction in the benchmark oil price in the 2012 budget, albeit partially reversed by the National Assembly, was also a step in the right direction.
Nevertheless, although the Federal government’s budget deficit and consolidated government budget surplus are within the range experienced by newly IG countries, they are not as strong as some of the major oil producers when they made the transition to IG – notably Azerbaijan and Russia. Increased fiscal savings in Nigeria’s new sovereign wealth fund will be a key driver of Nigeria’s rating.
Nigeria’s stable and robust GDP growth of more than 7% since 2009 compares well with the record of newly IG sovereigns and is even more creditable given its reliance on the non-oil sector.
However, structural reforms planned in the electricity, oil and agriculture sectors, will be crucial if growth is to be diversified and sustained closer to double digits, in order to close the large gap in per capita income. Even with a likely substantial increase in nominal GDP this year due to the rebasing of the national accounts, Nigeria’s per capita GDP will still be outside the range enjoyed by the newly IG countries when they became IG.
Nigeria’s inflation rate is also still on the high side – in low double digits compared to an average of 7.5% for newly IG sovereigns and a range of 5% to 12%.
By contrast, Nigeria scores much better on the government debt ratio which, despite creeping up, at a little under 20% of GDP is lower than the 26% average for newly IG sovereigns. Nigeria’s ability to finance itself domestically, in its relatively well developed domestic capital market, is also a major strength compared to many newly IG sovereigns.
