8 November 2012

Nigeria: Standard and Poor's, Moody's Upgrade Nigeria's Ratings On Financial Stability

Photo: Leadership
Bread seller in Abuja.

Standard & Poor's (S&P), an international ratings agency, Wednesday upgraded its long-term foreign and local currency sovereign credit rating on Nigeria to BB-, three notches below investment grade, from B+ because of improved financial stability.

S&P's rating coincided with that of another global credit ratings agency, Moody's, which assigned local and foreign currency issuer ratings of Ba3 to Nigeria due to the country's stable outlook.

In contrast, Africa's largest economy, South Africa, suffered a ratings downgrade last week by one notch to BBB with a negative outlook. S&P said mining strikes and social tensions could reduce fiscal flexibility and hurt growth of the South African Economy.

Moody's also downgraded the South African economy by one notch to Baa1 from A3 last month, citing worries about the country's institutional strength, investment climate, as well as future political stability.

On Nigeria, the S&P report, according to Reuters, cited higher forex reserves and government reform efforts on fuel subsidies and in the electricity and banking sectors as reasons for the upgrade.

Nigeria has sustained its accretion of external reserves, which stood at $42.688 billion as at November 5 - its highest in the last 32 months.

At the same time, S&P affirmed its 'B' foreign-and local-currency short-term ratings on the country just as it raised the long-term national scale rating to 'ngAA-' from 'ngA+'.

S&P further noted that foreign currency savings in Nigeria had grown due to the partial removal of fuel subsidies and higher oil prices.

"Nigeria's fiscal assets in its excess crude account have risen to about US$8.4 billion in October 2012, which provides a reasonable fiscal buffer. Its external reserves buffer have also been strengthening on the back of high oil prices and strong exports.

"The government has sustained reform momentum in several key areas, including cutting the fuel subsidy and reforming the power sector, and the authorities have restructured and strengthened the previously troubled banking sector.

"We are therefore raising our long-term foreign- and local-currency sovereign credit ratings on Nigeria by one notch to 'BB-'.

"The stable outlook assumes that the government will continue to pursue its reforms, thereby helping to support strong economic growth, and that there will be no worsening of political tensions and no significant return of insurgency in the Niger Delta," the New York-based ratings firm said.

It added that the creation of the Asset Management Corporation of Nigeria (AMCON) and the Central Bank of Nigeria's (CBN) actions following the 2009 banking crisis had contained contingent liabilities from the banking sector.

It however warned: "We could consider lowering the ratings if fiscal and external balances deteriorate, for example as a consequence of a sharp drop in oil production or prices.

"Downward pressure could also build if reforms stagnate, growth falters, or political tensions or violence increase substantially.

"We could consider raising the ratings if the authorities consistently improve fiscal performance and significantly enhance foreign currency reserves, if transparency in the oil sector and on the fiscal and external accounts improves, and if institutional capacities strengthen, thereby converging with higher rated peers."

On its part, Moody's said the Ba3 ratings reflected "Nigeria's strong economic resilience and strength, which are underpinned by its vast hydrocarbon wealth, its relatively large size and developed non-energy sector, but offset by significant infrastructure needs, evolving governance structures which form a key challenge for Nigeria's institutional strength and the establishment of a Sovereign Wealth Fund, which should support the country's financial strength."

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