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S&P investment grade eludes Nigeria as reforms stall

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The lack of movement on key reforms by Nigeria is overshadowing its positive macro-economic backdrop, resulting in a failure to win an investment grade rating from Standard & Poor’s (S & P) a global financial services rating agency.

Nigeria has a long-term foreign and local currency sovereign credit rating of BB-, with a stable outlook, from S&P. In contrast, South Africa is rated BBB with a negative outlook. Any rating lower than a BBB- is considered speculative or junk.

“Nigeria would need to build up a much larger cushion in its SWF/ECA balance and diversify its economy against an oil price shock, for a much higher rating,” Konrad Reuss, S & P,MD for Sub-Saharan Africa, said in a November 27 interview with BusinessDay.

“Key reforms such as the P.I.B would have to be enacted…there should be realistic assumptions to the oil price in the budget.”

An investment grade rating for Nigeria would mean lower borrowing costs on sovereign debt.

South Africa sold $2 billion of bonds due in 2025 in overseas debt markets in September at a yield of 6 percent. That compares with yields of 6.60 percent when Nigeria sold $500 million of 10-year notes in July.

The Finance minister Ngozi- Okonjo Iweala has said it may sell up to $1billion next year, as the country moves to diversify its funding source.

“We intend to enter the market on a regular basis because we’re trying to build a yield curve,” Okonjo Iweala said.

The Nigerian economy may expand 6.75 percent next year, compared with an estimate of 6.5 percent in 2013.

The nation’s current account surplus–a measure of trade in goods and services- may widen to $20.1 billion or 6.9 percent of Gross Domestic Product (GDP) in 2013 while the budget deficit should fall to 1.8 percent of GDP this year, according to investment Bank, Renaissance Capital’s estimates.

The total debt to GDP ratio of 30 percent is less than the average for rated peer countries, while October inflation at 7.8 percent is the lowest in five years.

Reuss says that while the positive macro-economic ratios highlighted would argue for a much higher rating for Nigeria, it is balanced by weak institutions, low developmental and income indicators, as well as the need for further institution building.

 “Nigerian ratings are constrained by a lack of movement on reforms, which will require strong decision making…perhaps post 2015,” Reuss said.

 President Goodluck Jonathan, two and half years through a four-year term failed to totally eliminate fuel subsidies in 2012, while the benefits of the privatisation of power assets are yet to kick in.

 The ECA balance is down to $3.6 billion in November (from $9 billion in January), equivalent to a mere 1.2 percent of GDP, compared to a fiscal savings average of 65 percent of GDP among major oil exporting countries.

 Lawmakers are proposing to hike the benchmark oil price to $79/ barrel from $74 preferred by the executive in the 2014 budget proposal.

 Oil revenues account for about 70 percent of Nigeria’s $32 billion 2013 budget Federal budget, and are the largest source of foreign exchange at 90 percent.

 “We expect the overall fiscal position to deteriorate as the country moves closer to the 2015 polls,” said Samir Gadio, an emerging markets strategist at Standard Bank in London, in a note released, Nov. 19 after the last MPC meeting.

“The consolidated fiscal slippage expected from next year will probably take the form of a further depletion of the ECA, an increase in bond issuance volumes…and an accumulation of public sector arrears.”

Nigerian dollar reserves of $44.6 billion (Nov. 26) fell to the lowest level in 10 months as the CBN struggled to maintain naira stability amid reduced inflows on speculation that the Fed will curtail its so-called quantitative easing, by March, 2014.

Foreign investors’ holdings of Nigerian bonds and Treasury bills increased 127 percent to $11.6 billion in the year to September 30, 2013 from $5.1 billion, after the country’s inclusion in the benchmark JP Morgan GBI-EM local currency bond index according to a Reuters report, released last Monday.

Gadio says said he prefers the short USD/NGN carry trade “given the favourable exchange rate outlook” for the naira notes, while remaining underweight Nigerian Eurobonds on steep valuation.

The yields on Nigerian 10-year FGN bonds have flattened to a 12.7 – 12.8 percent range in recent months, while the naira has stayed in a 158-159 range against the dollar since last month on CBN monetary tightening measures.

Article Credit: BusinessDay Newspapper

Updated 5 Years ago

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