A split sovereign rating, again


Friday, March 27, 2015 9:04 AM / FBN Capital Research


On 20 March S&P downgraded the federal republic’s long-term, foreign currency credit rating from BB- (negative) to B+ (stable). It had placed the sovereign on a negative outlook on 10 February.


A leading driver is naturally the decline in oil prices, and the deepening of Nigeria’s external vulnerabilities. We do not know S&P’s forecasts for the Nigerian oil price or the naira exchange rate but we see that it expects an average current-account deficit of 1.8% of GDP in 2015-18, peaking at 2.8% this year and next.

For 2015, we see an average price for Bonny Light of US$58/b and a deficit equivalent to 0.8% of GDP. It could be that we assume greater import compression in response to the exchange-rate adjustment than S&P. 

Another driver behind the downgrade is the agency’s opinion that closely contested elections could pose risks to the FGN’s ambitious fiscal consolidation. Since the commentary notes (and tacitly applauds) the FGN’s fiscal response to the halving of the oil price, we assume that these possible risks lie in extended challenges to, and delays in the handover to a new administration. This is the theory of a lost year for the economy.

Among the published selected indicators, we note the estimate of 16.3% for general government debt/GDP in 2014. We would put this ratio, which includes all tiers of government and AMCON, above 20%.

S&P sees average GDP growth of 5.0% for 2015-18.


Fitch has the sovereign on BB- for the comparable rating. It tends to make fewer changes to its Nigeria ratings and outlooks than S&P, which created waves with an earlier, disputed downgrade to B+ in August 2009.


The downgrade places the sovereign on the same rating as two other sub-regional oil producers (Angola and Gabon), and two notches above a third with a track record of electorally driven twin deficits (Ghana). We assume that it would be reversed in the event of an oil price recovery and/or a more rapid and less contested transition after the elections than the possible risks imply.


The more aggressive market analysts tend to view the ratings agencies (as well as the IMF) as material for target practice. The agencies have a clear role to play and a different set of skills to analysts. Our hunch may be closer to Fitch than S&P but both are performing an essential service


Related News:
1.Nigeria: S&P Ratings downgrade behind the beat, Reaction & implications
2.S&P cuts Nigeria rating to B+ from BB-, cites political risk


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