Fitch Ratings, an international independent rating agency, yesterday rated Nigeria's economic outlook as stable. The agency also affirmed the country's long-term foreign and local currency IDRs and senior unsecured bond ratings at 'BB-' and 'BB' respectively, while the short-term foreign currency IDR was rated 'B' and Country Ceiling at 'BB-'.
This vote of confidence on the prospects of the Nigerian economy is coming a few days after another respected international rating agency, Standard & Poor's also affirmed a strong and positive rating for the management of the economy.
According to the agency, the affirmation reflects the following key rating drivers, a gross domestic product (GDP) growth of 6.4 per cent in the first half of 2013, noting that though lower than the level in 2012, the country showed resilience in the face of exogenous shocks.
The agency noted that though there were severe floods in 2012, which hit agricultural output; security problems, especially in the North earlier this year, and increased oil theft and vandalism and the consequent repair shutdowns, which caused oil output to contract for the second year in a row, the non-oil economy had slowed but still grew by 7.9 per cent in 2012 and 7.6 per cent in the first half of 2013.
The agency expressed optimism that non-oil growth should pick up in the second half of 2013, as normal weather had resumed and the authorities had responded to the security problems. Reforms to the electricity and agriculture sectors could start to boost potential growth.
Other key drivers of the rating, as highlighted by the agency, included inflation rate, which had remained in single digits all year - the lowest in five years and the longest stretch of single digit inflation since 2008. Also, policy rates were unchanged and the Central Bank of Nigeria (CBN) had the twin aims of achieving single-digit inflation and maintaining exchange rate stability.
Reacting to the rating, the coordinating minister for the Economy and Finance, Dr Ngozi Okonjo-Iweala, stated that, "The rating confirms that Nigeria's economy is resilient, just like the Nigerian people are resilient. What's important about the ratings is that while acknowledging all the challenges the economy faces, it points to and applauds the strengths, such as progress in the power sector, increased focus on agriculture, strong investment in local manufacturing and other areas."
Fitch also adjudged public finances as remaining comfortable and estimated a general government deficit of around 1.8 per cent of GDP this year and next.
"Both oil and non-oil revenues are under-budget and the Excess Crude Account (ECA) has been tapped to compensate. Capital spending also remains under budget. The draft 2014 budget plans ambitious fiscal consolidation, with lower oil production and benchmark oil prices and lower spending than the 2013 budget. However, Fitch expects that oil production will likely fall short again, and the final budget that emerges from the National Assembly (NASS) is likely to be more expansionary. Nevertheless, Fitch expects general government debt to remain stable at just over 20 per cent of GDP, barely half that of peers.
"Nigeria's sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than 'BB' category medians. Foreign reserves rose steadily in early 2013 but have been falling since May due to reduced oil output, prompting ECA drawdown, and global market turbulence, which has reduced foreign appetite for NGN paper (though net inflows have continued)."
CBN intervened to support the naira when it came under pressure mid-year after Fed-tapering turbulence, although reserves have held up much better than many large emerging markets. Nigeria effectively re-opened the Eurobond market in July, raising USD1bn in its second issuance.
The agency however said that reform progress remained mixed; adding that while electricity privatisation had passed a key milestone with generators and distributors now in private hands and output seeming to be on a rising trend, the Petroleum Industry Bill (PIB) remained stalled in the NASS. It noted that electricity production had been affected by gas pipeline damage and the impact on GDP growth was hard to discern. Agricultural reforms are also gaining traction.
According to Fitch, Strong vested interests would make structural reform a continual struggle, especially with elections in 2015.
"The most obvious benefit to the economy has been a fall in imports last year, due to reduced oil subsidy payments, a crackdown on fraud in the oil subsidy system and substitution in the agricultural sector. Nigeria's ratings remain constrained by weak governance, low per capita income and vulnerability to oil price volatility. The government is responding to the Boko Haram insurgency mainly with security measures. Data weaknesses hamper the monitoring of economic and fiscal performance and reform progress," the agency stated.