Standard & Poor’s Upgrades Nigeria’s Rating to Positive

Standard & Poor’s Ratings Services said today it revised its outlook on the Federal Republic of Nigeria to positive from stable. At the same time, we affirmed the ‘B+/B’ long- and short-term issuer credit ratings and the ‘ngA+/ngA-1’ long- and short-term Nigeria national scale ratings. The transfer and convertibility (T&C) assessment is unchanged at ‘B+’

The outlook revision indicates that there is at least a one-in-three likelihood of an upgrade if Nigeria’s reform initiatives support economic growth, build stronger buffers against Nigeria’s dependence on petroleum revenue and reduce pressure on the exchange rate. After national elections in May 2011 and strong GDP growth rates over the past few years, Nigeria has tightened its fiscal and monetary stance by reducing projected fiscal deficits and by raising its monetary policy rate. It plans to cut a fuel subsidy, which we understand has been paid from the Excess Crude Account (ECA) in the past. This is one of several important reform initiatives President Goodluck Jonathan has promoted since he succeeded late President Yar’Adua in February 2010. Over the past two years, the authorities have also strengthened the banking sector. The government furthermore aims to improve predictability and transparency in the oil sector by drafting and passing the Petroleum Industry Bill, and plans an overhaul of the country’s electricity sector that should reduce power supply constraints.

The ratings on Nigeria are constrained by our view of the country’s internal political tensions, weak political institutions, and faltering efforts to institute buffers that will allow countercyclical policy options. Nigeria also has a low level of development and significant infrastructure shortfalls, in our view. Inconsistencies in reported external data also constrain the ratings. The ratings are supported, however, by low fiscal and external debt burdens, owing to debt write-offs in 2005 and 2006 and high petroleum prices supporting exports and government revenues in recent years.

Gross general government debt has slightly increased in recent years to an expected still-low 16% of GDP at year-end 2011. Net debt has remained below 6% of GDP. With the government’s fiscal consolidation plans and high nominal GDP growth rates, we expect that fiscal debt ratios will somewhat decrease again over the next few years.

Nigeria’s current account balance has consistently been reported to be in surplus, although in the past two years errors and omissions have exceeded the surplus, which in our view is probably overstated by unreported imports. Crude oil exports accounted for 72% of current account receipts in 2010. A potential upgrade would also be predicated upon no worsening of the political tensions between the Islamic north and Christian south and no significant deterioration in the country’s fairly weak performance on international corruption and ease-of-doing-business measures. Alternatively, we could revise the outlook to stable if fiscal and external balances fail to improve. This could be, for instance, as a consequence of a sharp drop in oil production or prices, or if political tensions or violence increase substantially, affecting overall political stability in the country.