Nigeria’s credit rating drops over poll risks, falling oil prices

Standard & Poor’s (S&P) yesterday downgraded Nigeria’s credit rating. This came when the rating was reviewed last month because of falling oil prices and rising political risks ahead of delayed elections due next weekend.
Nigeria’s foreign and local currency long-term rating BB- was cut one level to B+, four levels below investment grade. The outlook was changed to stable.
“The decline in oil prices in the last seven months has significantly affected Nigeria’s external position and external vulnerability. The tightly contested general elections may pose risks to Nigeria’s external position and the implementation of what we view as the government’s ambitious fiscal consolidation plans, while the Boko Haram group continues to disrupt the northeast,” S&P said in a statement.

Nigeria, 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. The naira has weakened 18 per cent in the past six months, the most after Zambia’s kwacha among 24 African currencies tracked by Bloomberg.
Currencies Analyst, Ecobank Nigeria, Olakunle Ezun, said the downgrade worsens public and investor perception of the economy, already hit by a fall in oil prices, reserves and the local currency.
He told Reuters that the action could increase the borrowing costs of the federal government and the 36 states.

Head, Africa Research at Standard Chartered Bank, Razia Khan, said in an e-mailed response obtained byThe Nation that having only just put Nigeria on credit watch negative in February, citing revised oil price assumptions in 2015 and in the medium-term, the move is not entirely surprising.
“Despite Nigeria’s relatively-diversified economy, its fiscal revenue and export dependence on oil continues to be a key vulnerability. The extent of that vulnerability has been exposed by weak fiscal buffers and subsequent pressure on its foreign exchange reserves,” she said.
Khan said she does not expect the confirmation of the S&P downgrade to have a significant impact on Nigerian assets, as the risk of any ratings action had largely been priced in already.
“Elections, expected in a week’s time, are a much bigger driver of investor sentiment. The hope is that Nigeria will witness sustained reform momentum in reaction to weaker oil prices, ultimately lessening its economic vulnerabilities.  However, progress on any economic reform will only be gauged in the medium-term.  For now, the stable outlook assigned to Nigeria’s rating suggests that there is little risk of further ratings action from S&P in the near,” she said.
Fitch Ratings will publish a review on its BB- rating for Nigeria, which has a stable outlook, on March 27, the eve of the vote.
Moody’s Investors Service also has a stable outlook for the country and rates it Ba3, the same as Fitch.