12 November 2012

Nigeria's Impressive Credit Rating, in Whose Interest?

Photo: Vanguard
Cartoonist depicts the state of Nigerian economy


It is important that every project or experiment be assessed from time to time. However, the purpose of the assessments and the parameters or reasons for such is important for the survival of the projects.

When the purpose and reason is not developmental, it becomes a source of worry, particularly for the people the project or experiment is meant to benefit.

When the Central Bank of Nigeria (CBN), intervened in 2009 by putting some sick banks on 'life support' mechanism, the international rating agencies cut the country's rating from BB- to B+. Their thinking and reason was that the intervention was wasteful spending of government resources and might impact on fiscal balance negatively.

But to the surprise and perhaps chagrin of the international experts who often advise Nigeria on the way forward for her economy, the move which they technically objected to, became the saving grace of the banks and to a larger extent, the whole of the economy with little or no negative effects on the fiscal side.

The latest upgrade in rating is coming up amidst acknowledgements that unemployment has almost doubled in the country. This and other economic indicators, are prompting the question - in whose interests are these ratings?

The current rating by S&P which gives the country's economy a stable outlook, is premised on improved fiscal and external buffers, and strong growth, which is not visible since there is little or no development to point to.

The rating agency, Standard and Poor's (S&P), has upgraded Nigeria's long-term foreign and local-currency sovereign ratings to BB- from B+ previously. Nigeria's foreign and local-currency short-term rating is affirmed at B.

Razia Khan, Regional Head of Research, Africa Global Research, Standard Chartered Bank, London said, "S&P's rating action reverses its August 2009 downgrade of Nigeria's sovereign rating to B+ from the initial BB- first assigned in early 2006. In our view, this downgrade which came immediately after regulatory action by the Nigerian authorities to safeguard the banking sector, injecting new capital into Nigeria's failed banks, was flawed. It assumed an unlikely fiscal burden as a result of Nigeria's banking rescues. The eventual bailout mechanism, the creation of an asset on the balance sheet of the CBN to inject as Tier 2 capital into the rescued banks, followed by the establishment of an asset management company to purchase Non-Performing Loans (NPLs), from the banking system, has to date had minimal fiscal implications. Contingent liabilities have been contained. The bank rescues are to be paid for through CBN contributions to a sinking fund as well as a levy on the balance sheets of all Nigerian banks. Three years after the regulatory intervention, financial-sector health has been restored. To this extent, the rating action is welcomed".

But had the intervention not taken place against all odds to sustain a good rating, would the economy not have been worse off?

Okechukwu Unegbu, former president of the Chartered Institute of Bankers of Nigeria (CIBN), said he does not believe in the rating agencies. According to him, they are simply making their money.

He told LEADERSHIP in a telephone interview that the ratings they give countries are simply far from the realities on ground.

Unegbu recalled that the rating agencies had sometimes back, downgraded the economy of the United States, but in spite of all that, he said the country remains number one in the world.

On the issue of credit he said the rating agencies, again are not saying the truth. According to him, credit to the government might be going up, but clearly not to the real sector.

But Bismarck Rewane, chief executive of Financial Derivatives Company (FDC) Limited in his October report said, "This is great news for an economy in search of direction and attempting to transform itself from its current backward state to that of an emerging market".

He however said there are major risks of a downgrade or a revised outlook. The events that could trigger this include but are not limited to an escalation of sectarian violence, the non-resolution of the

N945 billion fuel subsidy issue and continued bureaucratic bottlenecks and institutional weaknesses. A downgrade at anytime could be a kiss of death for the Nigerian economy.

Khan said, "Although a marginal positive, we do not expect this upgrade to have much market impact for a number of reasons. First, it merely restores S&P's previous rating, and it is essentially the same as Fitch's BB- rating with a stable outlook. Second, the pricing of Nigeria's Eurobond and the level of investor activity in Nigeria, especially in the months following the announcement of its inclusion in the J.P. Morgan GBI-EM index, appear consistent with a more favourable investor assessment of the country's credit worthiness than suggested by its BB- rating. In June 2012, the authorities estimated the stock of foreign portfolio investment in Nigeria at $5 billion (representing both bonds and equities). More recent estimates put this number at a $6-8 billion range. Near-term, we expect the inflows to persist".

But in support of its rating action, S&P cites the increased assets in Nigeria's excess crude account ($8.4 billion in October), deemed to provide a "reasonable fiscal buffer", as well as sustained reforms in several key areas - the fuel subsidy, the power sector and the banking sector.

"The outlook on the rating is stable", it said.

John Okolo, an analyst in Lagos, asked what happened to the huge savings by former president Olusegun Obasanjo's huge forex reserves. According to him, if that huge reserves did not transform the economy, what are the proofs that the build up of Excess Crude Account (ECA) or increasing high forex reserves will make a difference this time?

Although Nigeria appears to be in the comfort zone, Khan however, said even more is needed to enhance fiscal transparency.

"Greater finance ministry oversight into Nigeria's actual oil earnings - still something of a mystery given the current framework - would be a significant win. Although this does not seem to have been taken into account in existing draft legislation of the Petroleum Industry Bill (PIB), the hope is that this important matter, which could put Nigeria in sight of a much higher rating, will be addressed when the PIB is eventually passed", she said.

She also said despite projections for lower fiscal deficits in the coming years (the deficit is forecast to narrow from close to three of Gross Domestic Product (GDP) in 2012 to 2.17 percent in 2013, albeit on increased oil-price and output assumptions, Nigeria remains very dependent on oil earnings for its overall fiscal revenue.

Her worry is that, at the consolidated government level (involving federal, local and state governments) oil still accounts for over 70 per cent of revenue. Although the build-up of new savings in the ECA, essentially a buffer against any oil price weakness, is a positive, this is no substitute for the longer-term diversification of fiscal receipts, which is still urgently needed.

"Finally, fiscal performance over the course of the cycle must still be gauged. Despite encouragingly benign spending and deficit projections near-term, Nigeria's ability to sustain this even over the course of the political cycle straddling the 2015 elections will be key to any future credit assessment. Ahead of the last elections in 2011, in financial year 2010, spending was raised 50 percent year-on-year (y/y)".

Khan said increased investor interest in Nigeria, its bond index inclusion and ballooning activity in its capital markets have led to many questions about Nigeria's eventual eligibility for emerging-market status. In line with the experience of higher-rated peers, this is something that is likely to happen well ahead of Nigeria achieving an investment grade rating.

Nonetheless, she said "while the recent re-accumulation of FX reserves courtesy of tight monetary policy and attempts at fiscal consolidation have served Nigeria well, much more is likely to be required in order to trigger further rating upgrades. Cyclically, Nigeria has done relatively well, but structural concerns remain. The country's low per capita GDP, unaddressed governance issues and the political risk that result, will continue to constrain its rating. With a demographic profile that presents greater challenges relative to similarly rated peers, there can be no room for slippage in the long-term reform process. Reform is an urgent necessity, not a luxury".

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