Fitch Affirms Nigeria at ’BB-’; Outlook Stable

The affirmation reflects progress on a number of fronts including a tighter fiscal stance, an improvement in electricity supply, increased agricultural output which has helped reduce imports, and an increase in international reserves. Nonetheless, the reinvigoration of structural reforms has yet to feed through to a higher growth rate and weaknesses including a vulnerability to oil price shocks, high inflation and governance challenges weigh on the rating.

The partial elimination of the petroleum subsidy in January sent a strong message about the government’s reformist intentions. Although the move did not go as far as originally planned, it is an important step in the right direction. Moreover, the political furore it prompted paved the way for a clean-up of the subsidy payment system and crack down on the inefficiencies and fraud that have been uncovered. This has brought important gains to government revenues and international reserves, including the Excess Crude Account (ECA) which has risen to USD8bn this year.

The reforms have yet to have a noticeable impact on GDP growth. Growth has slowed this year, averaging 6.2% in H112, compared to an average 7.4% in 2009-2011. Fitch believes the slowdown is temporary, affected by security and weather problems which have particularly affected agriculture. A recovery to 7% or more should be possible next year. However, there is no sign yet that growth is moving to a higher plain, which should happen as the reforms take hold. The banking system is also still convalescing, with credit growth barely positive in real terms due to high interest rates, limited lending opportunities and improved risk management.

A redraft of the long-delayed Petroleum Investment Bill was recently submitted to parliament. The prolonged debate of this key piece of legislation, affecting a vital sector of Nigeria’s economy, has brought major uncertainty and been detrimental to investment. Passage of a bill that achieves the goal of a progressive fiscal framework while encouraging investment would be credit positive.

Significant fiscal tightening is underway. Fitch expects the general government overall balance (including an estimate for state and local government) to move into small surplus this year - the first since 2008. At the federal government (FG) level, H1 figures suggest the deficit (official definition, at the benchmark oil price) may narrow by 1.4% of GDP, although it may slightly overshoot the budgeted level. At actual oil prices, including net flows to the ECA, Fitch expects the FG surplus to increase. The draft 2013 budget is consistent with further fiscal tightening and a broadly stable general government debt ratio, which Fitch forecasts at 22% of GDP at end-2012.

The combination of a tighter fiscal stance, the reduced petroleum subsidy and a tightening of the subsidy payment system and other FX transactions, has resulted in a month-by-month increase in FX reserves this year of a cumulative USD9.1bn. This goes some way towards replenishing the buffer to withstand future oil price shocks. However, reserves still represent only 4.5 months of current external payments, compared to almost eight in 2008. The inauguration of the Nigerian Sovereign Investment Authority could herald a stronger mechanism for saving above budget oil revenues. However, it is not clear when it will begin receiving regular inflows.

Nigeria’s rating is constrained by long-standing structural weaknesses including a per capita income well below both ’B’ and ’BB’ medians. A likely substantial upward revision to GDP due to rebasing will not fundamentally change this metric. Even after this, and with nominal GDP growth of up to 20% per annum for the next two years, per capita income would remain well below the ’BB’ median. Other constraints include weak governance, a poor business climate, and relatively high and volatile inflation.

Continuation of structural reforms that brought faster GDP growth, higher per capita income, increased international reserves and lower inflation would be ratings positive.

The main driver of negative rating action would be sustained lower oil prices and an inappropriate policy response, or a reversal of reforms.