ECR experts endorse Nigerian credit rating upgrade


Matthew Turner
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The decision by S&P to upgrade its rating for Nigerian sovereign long-term risk, both foreign and local currency, by three notches to BB+, is another important development for Africa’s second largest economy.

Yields on Nigeria’s 10 year sovereign bond fell 38 bps following the announcement of the decision last week.

S&P cited “an improvement in the government's fiscal buffer and external position, ongoing reform momentum and expected strong economic growth, especially in the non-oil sector” as the main drivers behind the decision to upgrade Nigeria’s credit rating. 

Economic growth remains strong, with GDP growth projected at 7.1% for the end of 2012 and 6.6% for 2013, according to the IMF. ECR analysts assigned a score of 6.1 points for Nigeria’s economic outlook indicator in Q3, above the average score for Sub-Saharan Africa (SSA). 




Maxwell Ojelede, Chief Economist at Oldstone & Green, says: “it was a good decision, considering the level of real GDP growth in the economy, stemming from additional improvements in the area of FDI and job creation. Nigeria has also benefited from a stable banking system, which has been the major driver in the economy for attracting FDI.”

Ongoing reform momentum in the energy and banking sectors was another positive step in the right direction for Nigeria’s credit rating improvement. S&P note that “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.”

Gregory Kronsten, head of research at FBN, says: “The strength of the external balance sheets was a key element in the decision to upgrade Nigeria. The banks enjoy very large margins and the crisis was reasonably well managed by the authorities, so the vast majority of the banks are back on their feet lending again, and bad debt overhangs have been removed by AMCON in exchange for bonds.”

Nigeria’s political and structural assessment scores may also be boosted by the government’s ongoing programme of economic reforms. “There are a lot of reforms in the pipeline, if these ground to a hault or were even reversed this would have a negative impact on Nigeria’s credit rating,” says Kronsten.  

Another factor that has benefited Nigeria has been a tightening in monetary conditions, resulting in Nigeria’s external reserve buffers improving. S&P said in a statement: “(Nigeria's) external reserve buffers have ... been strengthening on the back of high oil prices and strong exports.”

The rating decision is a turnaround from the decision by S&P to downgrade Nigeria back in August 2009, when it was thought that the government misunderstood the scale of the N620bn bailout fund, required to bailout nine banks by the Central Bank of Nigeria. 

This article was originally published by Euromoney Country Risk.