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Fitch downgrades Lagos outlook to negative

By BusinessNews Staff on April 10, 2015

Global rating agency, Fitch Ratings, says it has downgraded the outlook of Lagos State’s long-term foreign currency issuer default rating to negative from stable.

The decision, the credit rating agency said, followed the recent downgrade of Nigeria’s outlook, adding that Lagos State, as the issuer, was rated at the same level as the sovereign for the long-term foreign currency IDR.

Fitch, however, affirmed Lagos’ long-term foreign and local currency IDRs at ‘BB-’, short-term IDR at ‘B’ and national long-term rating at ‘AA+(nga)’.

According to the agency, the outlooks on the local currency IDR and on the national long-term rating remain stable.

Fitch said the rating action reflected the application of its international, local and regional governments’ rating criteria outside the United States, according to which subnational ratings could not usually be higher than their sovereign.

Highlighting the criteria for the decision, Fitch said in a statement on Wednesday, “An operating margin declining towards 30 per cent, unfavourable changes in the national tax policy, debt rising beyond Fitch’s expectations and economic instability, even at the local level, could lead to a downgrade.

“Also, a downgrade of the sovereign would prompt a similar action on the ratings of the state, as subnationals’ ratings usually cannot be higher than their sovereign under Fitch’s criteria.

“Conversely, the outlook could be revised to stable if improvements in budgetary performance result in debt levels at 1x the budget size, while maintaining a high component of subsidised foreign loans (about 30 per cent at end-2013), in turn lowering the debt servicing burden, and provided that the outlook on the sovereign is also revised to stable. Further improvement of the local economy, giving additional boost to internally generated revenue, would also be positive for the ratings.”

About three weeks ago, Nigeria’s credit rating was downgraded by Standard & Poor’s following the significant drop in crude oil price and rising political risks before the presidential election.

The rating agency also downgraded virtually all oil dependent economies, including Russia, Bahrain, Congo (Brazzaville), Kazakhstan, Oman, Venezuela, Angola and Gabon. S&P also assigned a negative outlook to Azerbaijan and Saudi Arabia.

Nigeria’s foreign and local currency long-term rating of BB- was cut one level by S&P to B+, four levels below investment grade. The outlook was changed to stable.

A statement by S&P had said, “The decline in oil prices in the last seven months has significantly affected Nigeria’s external position and external vulnerability.

“Africa’s largest economy, which derives 90 per cent of export earnings and 70 per cent of government revenue from oil, is struggling with Brent crude prices having halved since June. The International Monetary Fund predicts growth of 4.8 per cent this year, down from 6.3 per cent in 2014.”

[Punch]

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