S&P upgrades Nigeria’s credit rating to BB- for tighter fiscal policy

Standard & Poor’s upgraded Nigeria’s credit rating on Wednesday to BB- because of improved financial stability.

It cited higher foreign exchange reserves and government reform efforts on fuel subsidies and in the electricity and banking sectors.

The rating agency raised Nigeria’s long-term foreign and local currency sovereign credit rating to BB-, three notches below investment grade, from B+.

It noted that foreign currency savings have been boosted this year by the partial removal of fuel subsidies and higher oil prices.

According to the agency, the upgrade is based on a stable outlook with the assumption that the Nigerian government will continue to pursue its reforms, thereby helping to support strong economic growth, and that there will be no worsening of political tensions and no significant return of insurgency in the Niger Delta.

S&P noted that the upgrade reflects its view that “owing to fuel subsidy cuts, conservative budget oil price assumptions, improving fiscal management, and high prices, Nigeria’s fiscal assets in its excess crude account (ECA) have risen to US$8.4 billion (from US$2.0 billion at end-2010), which provides a reasonable fiscal buffer.”

“External buffers have also been rising on the back of high oil prices and strong exports, with foreign reserves standing at just above US$42 billion as of Nov. 1, 2012.”

Referring to the growing government’s which it claimed has “slightly increased in recent years to a still-low 20% of GDP at year-end 2011”, S&P still considered that “Nigeria’s relatively low government debt stock a key rating strength.”

Fiscal reserves in the ECA and the nascent Nigeria Sovereign Investment Authority (NSIA), combined, have increased from about US$2 billion at end-2010 to around US$9.4 billion (US$8.4 billion in the ECA and $1 billion in the NSIA) at end-October 2012, providing a potential fiscal buffer.

“In our view, the NSIA still needs to be developed and in the short term the ECA will continue to operate as the governments preferred account” the rating agency advised.

Nigeria’s current account balance has consistently been reported as being in surplus although high errors and omissions hamper our analysis of the external accounts. We estimate that liquid external assets exceed external debt by 27% of current account receipts, highlighting a strong position in the external account.