Premium Times (Abuja)

3 April 2014

Nigeria: Standard & Poor Revises Nigeria's Sovereign Credit Rating to Negative

Standard & Poor, S&P, Ratings Services, the global ratings agency for economies and markets, has revised Nigeria's sovereign credit outlook that affirmed Creditwatch Service's rating of negative.

Credit ratings are forward-looking intelligence opinions about credit risk showing the capacity of an organisation or government to meet its financial obligations in full and on time, due to overall shifts in the economy or business environment.

The agency, which released the outcome of its review last Friday, cited some political and economic developments as factors that may be responsible for the new rating.

Apart from the continued infighting in the ruling Peoples Democratic Party, PDP, which has heightened political tension and institutional risks, S&P also noted the escalating incidence of crude oil theft and vandalism of oil production facilities in the Niger Delta, which resulted in frequent shutdowns and curtailment of oil production.

The agency said the attendant reduction in the country's oil production figures negatively impacted oil revenue earnings, resulting in increasing dependence on the savings in the excess crude revenue account to augment budget implementation.

In 2013, estimated average oil production capacity stood at around 2.2 million barrels per day, bpd, against a budgeted volume of 2.5 million bpd.

However, in 2014, oil production has so far averaged about 2.25 million bpd against a reduced 2014 budgeted figure of 2.39 million bpd.

On the other hand, oil theft and pipeline vandalism have accounted for drastically cuts in oil production below levels assumed in the 2013 budget and 2014 budget proposals, with reduced revenue earnings from oil exports resulting in the growing depletion of ECA reserves, from more than $10 billion (N1.63 trillion) at end-2012 to about $3.4 billion (N491 billion) in February 2014.

Again, the ratings agency said the inability of the Federal Government to reassure the people of its commitment and guarantee to the independence of the Central Bank of Nigeria, CBN, management could slow down the progress made in the banking sector regulation and supervision.

With the recent suspension of the CBN governor, Lamido Sanusi, the confirmation by the National Assembly of a successor, Godwin Emefiele, without the issue of the missing $20 billion oil revenue resolved, financial analysts say these cast doubt on transparent and independent economic environment in the country.

Consequently, despite its decision to remove the long-term ratings on March 21, 2014 from CreditWatch Services, which left Nigeria with negative implications, S&P affirmed the 'BB-/B-' long- and short-term sovereign credit ratings for the country.

'BB-' rating is often assigned to countries whose economies are less vulnerable in the near-term, but face major on-going uncertainties to adverse business, financial and economic conditions.

'B-' rating is for countries whose economies are more vulnerable to adverse business, financial and economic conditions, but currently have the capacity to meet financial commitments.

S&P noted that the negative outlook for Nigeria was indicative that there was at least a one-in-three chance that the ratings on the country's economy could be lowered again within the year or next, if the political environment or fiscal picture did not witness significant improvements.

Justifying the rating, S&P stated that the negative outlook reflected its view that risks to the country's economy have increased as a result of the incessant infightings within the ruling PDP, which has heightened political and institutional tensions.

With the campaigns towards the February 2015 elections already gathering momentum, the political arena is witnessing an unprecedented rivalry, with many politicians jostling for positions within, while others are defecting to other political parties in search of greener political pastures.

The agency said extensive oil theft and consequent oil installation shutdowns have caused oil production to fall lower than government assumptions in its 2013 and 2014 budget plans, while fiscal buffers in the excess crude account, ECA savings have been drawn down over the last year.

S&P said the possibility of increased political influence on the central bank's management could weigh down on the progress made in bank regulation and supervision, particularly with the recent suspension of Mr. Sanusi.

Meanwhile, the 2014 Appropriation Bill is still pending approval by the National Assembly, while the rising incidence of insecurity in sections of the country, particularly the Northeast, where the insurgent Boko Haram holds sway, pose serious threat to fresh investment efforts.

The CBN at its 237th meeting of the Monetary Policy Committee, MPC, a fortnight ago raised the Cash Reserve Requirement, CRR, on private sector deposit by 300 basis points from 12 to 15 per cent as part of its monetary policy initiatives aimed at sustaining price and overall macro-economy stability in the country.

Acting CBN Governor, Sarah Alade, said the Committee was concerned about the sudden surge in domiciliary account balances, pointing out that it may offset the gains from the imposition of 75 per cent CRR on public sector funds.

Mrs. Alade also said monetary policy rate, MPR, was retained at 12 per cent and its corridor at current levels of +/-2 per cent, pointed out that these decisions were reflections of the success of the CBN's monetary policy to attain price and exchange rate stability, with the ultimate goal of transiting to a truly low inflation environment in the economy.

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