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Fitch affirms Nigeria at ‘BB-’/’BB’: outlook stable

By OMOH GABRIELBusiness Editor
FITCH Ratings Agency on Friday   affirmed Nigeria’s long term  foreign and local currency Issuer Default Ratings (IDR) at ‘BB-’and BB’respectively stating that “the outlook is stable for Nigeria. At the same time, the rating agency affirmed the country’s short-term foreign currency IDR at ‘B’ and the country ceiling at ‘BB-.’


A statement from the Ministry of Finance signed by Ms Deborah Chinwe Okafor, special assistant (communications) to the minister of finance said “obviously the positive rating by Fitch goes to show the successful efforts by the Federal Government in establishing a sound institutional framework for economic management in response to the downturn in the global economy.

In this instance, government had inaugurated a Presidential Steering Committee on Global Economic Crisis supported by a reinvigorated and reconstituted National Economic Management Team. Major coordinated efforts in this regard have focused on macroeconomic stability, financial sector soundness, improved public expenditure management and economic growth and diversification”.

Veronica Kalema, a director in Fitch’s Sovereign Department said in the rating report “Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers.”

Kalema further said in the report “Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks.”

Stating the reason for the rating the report said that “the government moved swiftly to base the 2009 budget on a lower benchmark oil price of $45/barrel. Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget.”

According to the report “The domestic debt market provides financing flexibility for the Federal Government  and a few state governments that have started to tap it to fund development spending. Nevertheless, state governments face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the Excess Crude Account. Fitch forecasts small budget deficits at the Federal Government and consolidated government levels and continuing low public debt of 12 per cent of GDP in 2009, well below the ‘BB’ median.”

The report also said “The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20 per cent depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation.

The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28 per cent to $44.8 billion in May 2009 since the peak of $62.1 billion in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category.

The recent increase in
oil prices, if sus
tained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action”.
According to Fitch “Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development. Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness. Following an average of 6 per cent+ growth in 2004-2008, in 2009 growth will slow to around three per cent, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms”


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