Fitch Affirms Nigeria’s Sovereign Ratings At 'BB-' and 'B-'

Barely two weeks after Standard & Poor (S&P), revised Nigeria’s sovereign credit outlook negative, London-based Fitch Group has released its rating affirming Nigeria’s sovereign rating at ‘BB-‘ with a stable outlook.

Fitch said 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 at 4.1% of GDP in 2013, and may be overstated given large errors and omissions. Foreign direct investment, FDI is less than 1% of GDP, amongst the lowest in the region.

S&P listed the continued infighting in the ruling Peoples Democratic Party (PDP), which has heightened political tension and institutional risks, as one of the factors responsible for the revised outlook.

Besides, it noted the escalating incidence of crude oil theft and vandalism of oil production facilities In the Niger Delta, which resulted in frequent shutdowns and curtailment of oil production as another reason.

S&P said it decided to remove the long-term ratings on March 21, 2014, from CreditWatch Services, which left Nigeria’s long- and short-term sovereign credit ratings at ‘BB-‘ and ‘B-‘ respectively.

‘BB-’ rating is often assigned to countries whose economies are less vulnerable in the near-term, but face major ongoing uncertainties to adverse business, financial and economic conditions.

‘B-’ rating is for countries whose economies are more vulnerable to adverse business, financial and economic conditions, but currently have the capacity to meet financial commitments.

However, the latest rating by the Fitch Group affirmed the country’s stable outlook, citing several current positive features of the economy to support its position.

Some of those positive features, the financial information services firm said, include improving stability in the economy after the controversial suspension of the Central Bank of Nigeria (CBN) Governor, Lamido Sanusi; the recent boost in the Excess Crude Account, ECA balance; rising oil production, and improved efforts to tackle pipeline vandalism.

Nigeria’s long-term foreign and local currency issuer default ratings, IDR, the ratings agency said, stood at ‘BB-’ and ‘BB’, respectively, while the economic outlooks were stable.

Also, it said the issue ratings on Nigeria’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BB-’ and ‘BB’, respectively, while the short-term foreign currency IDR was rated ‘B’ and country ceiling at ‘BB-’.

Fitch said the foreign exchange market and international reserves were becoming stable, with FX demand in the official auction reverting to normal levels in March and CBN intervention in the inter-bank market declining.

The inter-bank Naira/US dollar rate, the ratings agency said, has strengthened from its low levels, although it remained outside the upper limit of the 155 plus or minus 3% band.

It noted that official reserves rose in March, boosted by an increase in the ECA fiscal buffer.

Although the reserves fell significantly over the past year, Fitch said they remained within the ‘BB’ category peer medians at a projected 4.6 months current account payments at end 2014, although weaker than similarly rated oil exporters (Angola and Gabon).

Fitch noted the impact of the recent suspension of the CBN governor on the independence of the Bank, pointing out that it believed that an institution, such as that has been strengthened in recent years and should be allowed its autonomy over monetary and financial policy.

It noted that oil production during the period under review remained volatile, despite a marginal rise in the first quarter of the year to average 2.25 million barrels per day MB/D in line with the trailing 12-month average, above the recent low of 2.1MB/D in November and December 2013.

Improved production and increased efforts to tackle pipeline vandalism and oil theft, it said, helped explain the increase in the ECA in March.

It however, noted the impact of corruption in the oil sector and lack of transparency in oil flows, which resulted in the President agreeing to a forensic audit of the flows between the Nigerian National Petroleum Corporation (NNPC) and the Federal budget.

With the 2014 budget now passed by the National Assembly based on a conservative oil price benchmark of $77.5 per barrel and oil production assumption of 2.39 MB/D, government said production shortfalls were likely to continue, allowing further drawing on the ECA.

Nigeria’s debt burden after the recent GDP re-basing stands at 12.6% of GDP at end-2013, with Fitch’s debt sustainability analysis showing the debt ratio below the ‘BB’ median.

Continued economic growth, averaged 6.8 % over the past five years, led by non-oil growth of an average 7.7 %, while revised national accounts showed growth accelerated to 7.4 % in 2013, with a 5.2 % increase in gas production.

With the recent GDP re-basing, Nigeria’s economy shows a more diversified base, with the non-oil sector comprising 86 % of GDP and services 52 % of GDP, from 29 % previously, with the oil and agriculture sectors now having a reduced share in GDP.