Nigeria's foreign external reserves last week hit $42 billion as international rating agency, Fitch put the country's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' and 'BB' respectively with a Stable Outlook.
The reserves had been rising consistently over the past few months in line with the Coordinating Minister of the Economy's aims at building the reserves to $50 billion before the end of the year (2012), so as to serve as cushion for the economy in case of any global economic recess.
The presidency and the legislative arm of government are currently at odds over what the oil benchmark should be with the National Assembly settling for $78 per barrel benchmark against the finance minister's benchmark of $75.
According to Fitch, "The combination of a tighter fiscal stance, the reduced petroleum subsidy and a tightening of the subsidy payment system and other foreign exchange transactions, have resulted in a month-by-month increase in foreign exchange reserves this year of a cumulative $9.1 billion.
"This goes some way towards replenishing the buffer to withstand future oil price shocks. However, reserves still represent only 4.5 months of current external payments, compared to almost eight in 2008. The inauguration of the Nigerian Sovereign Investment Authority could herald a stronger mechanism for saving above budget oil revenues. However, it is not clear when it will begin receiving regular inflows", the rating agency said.
Fitch further said the ratings of the country reflect progress on a number of fronts including a tighter fiscal stance, an improvement in electricity supply, increased agricultural output which has helped reduce imports, and an increase in international reserves.
However, it said the "reinvigoration of structural reforms has yet to feed through to a higher growth rate and weaknesses including a vulnerability to oil price shocks, high inflation and governance challenges weigh on the rating."
The rating agency noted that despite the various reforms of the government, "he reforms have yet to have a noticeable impact on GDP growth. Growth has slowed this year, averaging 6.2 per cent in first half of 2012, compared to an average 7.4 per cent in 2009-2011."
Fitch said it believes the slowdown is temporary, affected by security and weather problems which have particularly affected agriculture. "A recovery to 7 per cent or more should be possible next year. However, there is no sign yet that growth is moving to a higher plain, which should happen as the reforms take hold. The banking system is also still convalescing, with credit growth barely positive in real terms due to high interest rates, limited lending opportunities and improved risk management.
Nigeria's rating is constrained by long-standing structural weaknesses including a per capita income well below both 'B' and 'BB' medians. A likely substantial upward revision to GDP due to rebasing will not fundamentally change this metric. Even after this, and with nominal GDP growth of up to 20 per cent per annum for the next two years, per capita income would remain well below the 'BB' median.
Other constraints include weak governance, a poor business climate, and relatively high and volatile inflation.