Fitch Affirms Nigeria's Lagos State at 'B+'; Outlook Negative


Monday, February 27, 2017 9:01 AM/ Fitch Ratings 

Fitch Ratings has affirmed Lagos State's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'B+' with Negative Outlook and Short-Term Foreign Currency IDR at 'B'. The National Long-Term Rating has been affirmed at 'AA+(nga)', with a Stable Outlook. The ratings on the state's MTN programme as well as senior unsecured bonds have also been affirmed at 'B+'. 

The affirmation reflects the state's weak socio-economic indicators by international standards. It also reflects Fitch's expectations of resilient operating performance in the medium term adequate transparency compared with national standards and satisfactory debt metrics. The Negative Outlook reflects that of Nigeria ('B+'/Negative).

Key Rating Drivers

Fiscal Performance: Lagos benefits from a diversified revenue structure, and especially from strong internally generated revenues (IGR), which we expect to support our forecast of an operating margin of around 50% over the medium term. This, in tandem with the administration's commitment to keep cost growth under double-digit inflation, should mitigate pressure from a potential decline in oil-related state statutory allocations from the Federal Accounts Allocation Committee (FAAC). 

Management: After a 20% drop in 2015, Fitch expects political continuity following last elections to boost capex over the medium term up to an annual average of NGN450bn over 2017-2019, mostly focused on transportation, water, health, education and social protection. We expect the administration's efforts to improve transparency and accountability, together with a larger recourse to public-private partnerships, will attract foreign investments and, ultimately, sustain the state's revenue.

Debt and Liquidity: Lagos' debt will grow over the medium term up to NGN1trn or over 150% of tax revenues, driven by a demanding capex programme and the negative effect of the Naira devaluation. Fitch expects debt sustainability to remain adequate, with a pay-back (debt-to-current balance) ratio of around three years. Liquidity, averaging NGN100bn over the medium term and equivalent to approximately 1x annual debt service requirements, should not be a risk.

Economy; Despite its weak socio-economic indicators by international standards, Lagos is considered Nigeria's economic powerhouse as its GDP accounts for 20%-25% of national GDP. Domestic production is fuelled by its diversified economy, with services, construction, transport and industry making up 80% of the local economy. Given its limited reliance on oil- related activities, Fitch believes that Lagos' socio-economic indicators will further improve as we forecast local GDP growth to outperform national real GDP growth, at 4.5%-5.5% in 2016-2017.

Rating Sensitivities
A downgrade of the sovereign's ratings would lead to a corresponding action on Lagos' IDRs. In the absence of a sovereign downgrade, an operating margin declining towards 30%, unfavourable changes in the national tax policy, debt rising beyond Fitch's expectations over the medium term and economic instability, even at the local level, could lead to a downgrade. 

A sovereign upgrade may be reflected in Lagos' ratings, provided that budgetary improvements reduce debt levels to 1x the budget size. Further improvement of the local economy giving additional boost to IGR would also be positive for the ratings.

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