TEXT-S&P raises long-term rating on Nigeria to 'BB-'; outlook stable

Wed Nov 7, 2012 8:48am EST

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(The following statement was released by the rating agency)

Nov 07 -

Overview

-- 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 reserve buffers 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.

Rating Action

On Nov. 7, 2012, Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Republic of Nigeria to 'BB-' from 'B+'. At the same time we affirmed the 'B' foreign- and local-currency short-term ratings. We raised the long-term national scale rating to 'ngAA-' from 'ngA+'. We affirmed the short-term national scale rating at 'ngA-1'.

We revised the transfer and convertibility (T&C) assessment to 'BB-' from B+. The outlook is stable.

Rationale

The upgrade reflects our view that owing to fuel subsidy cuts, conservative budget oil price assumptions, improving fiscal management, and high prices, Nigeria's fiscal assets in its excess crude account (ECA) have risen to US$8.4 billion (from US$2.0 billion at end-2010), which provides a reasonable fiscal buffer. External buffers have also been rising on the back of high oil prices and strong exports, with foreign reserves standing at just above US$42 billion as of Nov. 1, 2012.

In addition, some reform momentum continues. In the past year, the government has cut the fuel subsidy by about half, overhauled the country's electricity sector, and raised electricity tariffs. GDP growth is also strong: in 2012-2015 we expect real per capita GDP growth to average 4.3% per year, driven by strong non-oil growth.

Gross general government debt has slightly increased in recent years to a still-low 20% of GDP at year-end 2011. We consider Nigeria's relatively low government debt stock a key rating strength. Fiscal reserves in the ECA and the nascent Nigeria Sovereign Investment Authority (NSIA), combined, have increased from about US$2 billion at end-2010 to around US$9.4 billion (US$8.4 billion in the ECA and $1 billion in the NSIA) at end-October 2012, providing a potential fiscal buffer. In our view, the NSIA still needs to be developed and in the short term the ECA will continue to operate as the government's preferred account.

Nigeria's current account balance has consistently been reported as being in surplus although high errors and omissions hamper our analysis of the external accounts. We estimate that liquid external assets exceed external debt by 27% of current account receipts, highlighting a strong position in the external account.

While Nigeria continues to face significant governance issues, violence in the Niger Delta, which has previously affected oil production, has decreased since the government granted an amnesty to insurgents in 2009. In addition, increasing deep-water offshore production is making the disruption of oil production, and oil theft, more difficult. Since 2011, violence related to the Boko Haram terrorist group has risen, but not to the extent of undermining the overall stability of the political system.

The creation of the Asset Management Company of Nigeria (AMCON) and the Central Bank of Nigeria's actions following the 2009 banking crisis have contained contingent liabilities from the banking sector.

Our local currency rating is equalized with the foreign currency rating because monetary policy options, which underpin a sovereign's greater flexibility in its own currency, are constrained by Nigeria's managed exchange rate regime and relatively less developed domestic bond markets. Our T&C assessment is equalized with the sovereign foreign currency rating to reflect our opinion that the likelihood of the sovereign restricting access to foreign exchange needed by Nigeria-based non-sovereign issuers for debt service is similar to the likelihood of the sovereign defaulting on its foreign currency obligations.

Outlook

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.

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.

Related Criteria And Research

-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011

-- Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

-- Introduction Of Sovereign Recovery Ratings, June 14, 2007

Ratings List

Upgraded

To From

Nigeria (Federal Republic of)

Sovereign Credit Rating BB-/Stable/B B+/Positive/B

Transfer & Convertibility Assessment BB- B+

Senior Unsecured BB- B+

Nigeria National Scale ngAA-/--/ngA-1 ngA+/--/ngA-1

Senior Unsecured (National Scale) ngAA- ngA+

Affirmed

Nigeria (Federal Republic of)

Recovery Rating 4 4

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