Sovereign ratings affirmed by S&P

S&P last week affirmed its B long-term sovereign credit rating for Nigeria. It therefore remains in line with Moody’s, which downgraded the credit last year, and one notch below Fitch’s B+ (with a negative outlook). The agency has sensibly opted for a “steady-as-she-goes” scenario: fiscal consolidation remains slow, annual growth is no more than 3.0% through to 2021 and Nigeria maintains its healthy external balance sheet marked by modest accumulation of both reserves and debt.

  • Ratings agencies have to tread carefully, although a little less than multilateral organizations. We share its view that decision-making is heavily concentrated in the presidency.
  • It has revised its estimate of the fiscal deficit of general government (ie the three tiers) in 2017 to 5.8% of GDP, from 3.5% just six months ago, on the basis of a weak preliminary outturn.
  • This was the low point since S&P sees steady improvement ahead, with a deficit equivalent to 2.3% in 2021. A little revenue growth is combined with modest compression of spending to deliver the underlying improvement.
  • Its projections have the interest payments of general government within a range of 20% to 25% of revenues in 2018-21. The ratio is worst for the FGN component, for which it sees the cost at close to 50%. This last measure is widely cited.
  • For the second and third tiers of government, S&P comments that the state and local governments will be running deficits around a combined 1% of GDP (about N1.1trn) through to 2019. The timing of this seeming turning point could be election-related although we suspect that the deficits have rather longer to run.
  • The projections have gross external financing needs above 100% of current account receipts and usable reserves throughout the forecast period. The assumption is that the FGN will draw on multilateral credit lines and tap the international capital markets to meet its additional needs. Both are relatively secure sources of financing under S&P’s “steady-as-she-goes” scenario.
  • It notes that the CBN has increased its external buffers to close to seven months’ import cover, based on its measures of usable reserves and current account payments. If we limit those payments to goods and services (and not income debits), the cover was more than ten months at end-February.
  • S&P has also affirmed its B short-term rating for Nigeria.

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