Nigeria could face a ratings downgrade to B+ from BB- if the newly-elected government fails to implement badly needed reforms post-elections to improve its outlook, a senior Fitch official said on Wednesday. Global ratings agency Fitch Ratings lowered Nigeria’s sovereign credit outlook to negative last October from stable, citing the depletion of its windfall oil savings and heightened political uncertainty ahead of elections at the time.
The successful conclusion of elections in Nigeria has removed some political uncertainty but the new administration must implement reforms if its credit rating is to improve, Fitch’s director of sovereign and international public finance Veronica Kalema told Reuters in a phone interview. “With oil prices where they are, implementation of reforms will see the ratings improve but lack of reform progress will keep the rating where they are and if oil prices fall, the ratings will come under downward pressure,” Kalema said.
Incumbent President Goodluck Jonathan won the popular vote last month with a wide margin over his main rivals, ending political uncertainty in Africa’s most populous nation.
Kalema said the elections have been more credible than previous ones, marking a positive sign for the country but that wasn’t sufficient to make a ratings change. “If reforms are implemented the rating outlook could be revised back to stable, but if not it could be downgraded to ‘B+’,” she added.
Kalema said the new government would have to implement reforms including establishing a sovereign wealth fund to protect its windfall oil savings and run a more fiscally prudent budget before the country’s ratings outlook can be raised. Rival ratings agency Standard & Poor’s currently rates Nigeria a ‘B+’.
As Africa’s top oil exporter, Nigeria relies on the commodity to generate more than 70 percent of government revenues. Oil CLc1 has stayed above the $100 per barrel since the start of the year but Nigeria’s credit rating remains hampered by poor governance, Kalema said.
Fitch plans to visit Nigeria in August to better assess the new administration’s policies.
Analysts say risk perceptions for Nigeria have improved after the elections and the potential for policy continuity could encourage the return of foreign capital to the country. Accounting firm Ernst & Young on Tuesday said Nigeria could be among the top ten countries to see a boost in new foreign direct investment (FDI) over the next few years. Nigeria has been building its foreign reserves which stood at $33.2 billion as at end of March given higher oil price, after they fell from $40.7 billion in March 2010.
A lack of clarity over the legal framework surrounding Nigeria’s windfall oil savings has allowed a significant part of the funds to be squandered in recent years, fuelling loose fiscal policy and inflation.
“The things that they need to do are not so complicated but it’s just that up until now there has been a lack of political will,” Kalema said.