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Experts Knock Standard and Poor

By Babajide Komolafe
Economic experts disagree with the Standard and Poor’s rating which recently downgraded Nigeria’s credit rating to B+ from BB- saying it is flawed and premature, Babajide Komolafe writes

Rural setting
Rural setting

Standard and Poor’s (S&P),  the leading global credit rating agency believes the ongoing banking reforms specially the N400 billion bailout money injected into the five banks by the Central Bank of Nigeria, CBN, is a negative development for the nation’s economy.
Consequently, it downgraded the country’ foreign currency denominated sovereign credit rating to B+ from BB-. Explaining the rationale for its decision the company stated that, “Nigeria, sub-Saharan Africa’s second biggest economy, has a stable outlook, adding that the financial, economic and political risks are balanced by a strong external and fiscal balance sheet.

“The lowering of the sovereign rating on Nigeria reflects our view of the government’s reduced fiscal flexibility due to costs associated with its recent bail-out of five large domestic banks, and also the fall-off in government oil revenue,” the firm said in a statement.
“In our opinion, the central bank’s action has begun a welcome restructuring of Nigeria’s banking system, but it also reveals deep problems in Nigeria’s credit markets, with the extent of problem loans beyond our previous estimates,” S&P said.

The decision of the rating agency was severely criticized last week by a broad spectrum of economic experts. Some of them said that the downgrade is flawed while other say it is premature. Speaking in Lagos, Razia Khan, Regional Head of Economic Research, Standard Chartered Bank spoke strongly against the downgrade saying that the bank and foreign investors did not agree with the rating.

She said that reactions from foreign investors, mostly portfolio investors, are that the decision is basically flawed. “At Standard Chartered we also believed that the downgrading is difficult to justify and disagree with the rationale for the decision.

“For example I received an email from a Hedge Fund in California the mail basically said the Standard and Poor’s decision is basically flawed. This particular investor was saying if Nigeria was to issue a Euro Bond the pricing would be tighter than for a similar B rated credit. And that is what it shows that the market would be of the opinion that the downgrade was not necessarily justified.

“Though Nigeria doesn’t have any plans for any imminent Euro Bond issuing but that is the view of the majority of the investors we speak to, that generally the reception to the banking sector reforms have been overwhelmingly positive. They don’t see it as a time of greater uncertainty for the Nigerian economy because there is no questioning in anybody’s mind that this is something that is needed to be put in place, that would ultimately bring about the sort of transparency and improved disclosure that investors are looking for.

“So on the whole from the investors that Standard Chartered has been speaking to, portfolio investors largely, the reaction has been overwhelmingly positive,” she said.

Speaking further, Khan said that  Standard and Poor’s rating of B+ puts Nigeria at par with countries like Ghana and Kenya and this is unjustified by the various economic parameters like the external balance sheet, size of the external reserve and the government debt to GDP ratio. She stated further that the bank also disagrees with the basis for the lower rating. “We do not agree with S&P that the banking reforms and especially the bailout of the five banks would constrain fiscal flexibility or lead to inflation.

“We see the banking reforms as something that is needed, timely, and beneficial and lead to better capitalization of the banking sector and enhance its status as the engine growth of the economy. We don’t see any fiscal impact of the reforms for now and we believe that Nigeria is not doing badly on the fiscal side now. So over all we see it as a positive one for the economy,” she said.

A former senior staff of the CBN corroborated Khan’s view saying that there was no basis for S&P to down grade the country’s rating. “You know most of these things are political. Look, our fundamentals are very strong. The inflation rate is declining and our Gross Domestic Product (GDP) though not as high as before but at about four percent compares favourable with that of the emerging economies. And our foreign exchange market has stabilized.

“Although we are having problem with supply but this is getting better as the amnesty to the militants progresses. So our fundamentals are very strong even when compared with that of countries like Russia,” she said.

Also speaking in an interview with CNBC Africa Thursday, First Bank Chief Financial Officer, Oladele Oyelola, said Standard & Poor’s downgrade of Nigeria was “difficult to justify”.

He averred that reasons for the downgrade were debatable. “Nigeria’s fiscal situation has improved, foreign reserves are stable and rising, and the bailout came from Central Bank’s funds and not the Federal account,” Oyelola said.

Commenting on the rating, President of Financial Market Dealers Association said “I wouldn’t say it is baseless. I am sure they have their reasons, maybe because of concerns with our foreign exchange from oil, because of the reduction in oil production, because of the issues in the Delta. And maybe concerns about the financial markets especially regarding what has been happening in the banking sector.

“So you can’t say it is baseless. But having said that, I think it came at a time given what the CBN has done things were turning around and I think the CBN is addressing the issues. I think that was part of the justification for the downgrade.  So for me I think they should have waited to see what the outcome of that exercise would be before making that judgment. So there is a school of thought that believes their decision was premature”.

A senior bank treasurer who spoke on condition of anonymity said that the country created the opportunity for the downgrade. “What they have done is like self preservation. Any risk manager would run naturally because of the going on would encourage temptation. Your foreign counterparty has shut down, all those dollar lines have shut down and that is the natural thing to do, let us see how the storm settles.

“But I hope that the CBN Governor’s visit to United Kingdom would address the issues in the overall interest of the country because we are looking at the bigger picture here,” he said.


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