To demonstrate its view that the country is on the right economic trajectory despite many challenges, Fitch Ratings has affirmed it’s robust ‘BB-‘sovereign rating of Nigeria with a stable outlook.
It cited several current positive features of the economy to support its position.
Such features include improving stability in the economy after the suspension of CBN Governor, Sanusi Lamido Sanusi, the recent boost in the Excess Crude Account, rising oil production and improved efforts to tackle pipeline vandalism.
Below is the full statement:
Fitch Affirms Nigeria at ‘BB-‘; Outlook Stable
Fitch Ratings-London-10 April 2014: Fitch Ratings has affirmed Nigeria’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and ‘BB’, respectively. The Outlooks are Stable.
The issue 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-‘.
KEY RATING DRIVERS
The affirmation reflects the following key rating drivers:
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 FX 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).
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%. Inflation fell to a new low of 7.7% in February, within the target range of 6%-9%. 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.
Oil production remains volatile but rose in 1Q14 to average 2.25mb/d, in line with the trailing 12-month average, and above the recent low of 2.1mb/d in November/December 2013. Improved production and increased efforts to tackle pipeline vandalism and oil theft may help explain the increase in the ECA in March. The issue of corruption in the oil sector and lack of transparency in oil flows has gained heightened prominence this year and the President has agreed to a forensic audit of the flows between state-owned oil company NNPC and the budget.
A tight budget has been approved. It assumes a conservative oil price of USD77.5/bl and a more realistic oil production assumption of 2.39mb/d. Although production shortfalls are likely to continue, allowing further drawing on the ECA, the authorities aim to increase the ECA this year. The budget envisages a fall in revenue and spending, although the latter will be achieved mainly through a more realistic assessment of capital spending capacity.
Other factors supportive of the affirmation include:
Nigeria’s low debt burden, which after the recent GDP re-basing is just 12.6% of GDP (general government) at end-2013, is well below medians throughout the rating scale. Fitch’s debt sustainability analysis shows the debt ratio would remain well below the ‘BB’ median in any plausible scenario.
Continued strong growth, which has averaged 6.8% over the past five years, led by non-oil growth of an average 7.7%. Revised national accounts show growth accelerated to 7.4% in 2013, with a 5.2% increase in the energy sector as gas production increased, notwithstanding a fall in oil production.
The GDP rebasing shows a more diversified economy, with the non-oil sector comprising 86% of GDP and services now put at 52% of GDP (previously 29%) with the oil and agriculture sectors now having a reduced share in GDP.
Nigeria’s sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than ‘BB’ category medians. However, the current surplus has been declining (4.1% of GDP in 2013) and may be overstated given large errors and omissions. FDI is less than 1% of GDP, amongst the lowest in the region.
Reform progress remains mixed. Electricity generators and distributors are now in private hands but transmission remains a problem and output remains volatile, affected by gas supply and other problems. Agricultural reforms continue to gain traction, leading to higher output and a reduced import bill. However, the Petroleum Industry Bill (PIB) remains stalled. Strong vested interests make structural reform a continual struggle.
Nigeria’s ratings are constrained by weak governance, as measured by the World Bank, low per capita income, even after the 89% uplift to 2013 GDP due to rebasing, and vulnerability of public finances and reserves to oil price volatility. Political noise has increased this year ahead of the February 2015 presidential and gubernatorial elections. The Boko Haram insurgency has also intensified this year though is geographically contained.
RATING SENSITIVITIES
The main factors that individually or collectively might lead to rating action are as follows:
Positive:
- Accelerated structural reforms that bring faster, more inclusive growth and higher employment and per capita incomes.
- Signs of a sustained increase in electricity production and passage of the PIB would be especially positive.
- A longer track record of low single-digit inflation.
- Improved external buffers, either in the ECA or the new Sovereign Wealth Fund (NSIA).
- Improved governance as reflected in World Bank and anti-corruption indicators.
Negative:
- Renewed pressure on reserves that further depletes Nigeria’s fiscal and external buffers.
- Reversal of key structural reforms.
- A serious deterioration in domestic security, whether stemming from terrorism or election-related violence.
KEY ASSUMPTIONS
Nigeria is highly dependent on oil for fiscal and external revenue. Fitch assumes Brent crude will average USD105/bl in 2014 and USD100/bl in 2015.
Fitch assumes the current stance of relatively conservative macro policy and incremental structural reform will remain in place in the forecast period, which goes up to the election year of 2015.
In particular, no significant fiscal spending overruns are assumed. At the same time, no significant acceleration in non-oil growth or net exports has been assumed nor any further reduction in petroleum subsidies, which would benefit public and external finances.
Fitch believes passage of the PIB before the election is unlikely, but failure to do so is assumed not to have any serious short-term impact on oil production. However, oil theft and associated capacity shutdowns are assumed to continue, although not worsen, meaning average oil output will remain around 2.2mb/d, significantly below potential of 2.5mb/d. It is also assumed that there is no major resurgence of violence in the Delta region.
The Boko Haram terrorist insurgency is assumed to remain contained and not to have serious consequences for economic performance.
