Nigeria’s rising debt burden is not healthy for the economy.
The recent ratings by international agencies putting Nigeria’s economy on a good stead is great for an economy trying to position itself as an emerging market, Bismarck Rewane, an economist has said.
But Nigeria’s recent debt burdens pose the risk of a revised outlook of the ratings or a downgrade and this could spell doom for the Nigerian economy, the economist fears.
Also, the escalation of sectarian violence, the non-resolution of the N945bn fuel subsidy issue and continued bureaucratic bottlenecks and institutional weakness, might cause a downgrade at any time and this could be a ‘kiss of death for the Nigerian economy, Mr. Rewane said.
Nigeria in recent times has had its economy upgraded by different rating agencies, with the latest being Standard & Poor, arguably the most reputable global rating agency.
Last week, the agency upgraded Nigeria’s sovereign credit rating.
Moody’s, another leading ratings firm, recently initiated coverage on Nigeria and assigned a rating of Ba3 for the first time.
“This is great news for an economy in search of direction and attempting to transform itself from its current backward state to that of an emerging market.
“A strong credit rating reduces the risk premium on Nigerian debt instruments. This is a big deal because it reduces borrowing costs of the Nigerian government and corporates in the euro bond market,” Mr. Rewane said.
Mr. Rewane, the Managing Director of Financial Derivative Company, FDC, a research, analysis and investment advisory firm also added that Nigeria’s inclusion in the JP Morgan and Barclays’s bond index increases the interest in the Nigerian instruments which is now being included in most EM portfolios.
Last year, the nation’s economy was upgraded by Fitch rating agency and it has been included in the JP Morgan emerging market bond index signifying increasing investor confidence in the economy. The world economic forum also upgraded the nation’s ranking from 127 to 115 in the global competitiveness index.
Standard & Poor’s Ratings Services last week raised its long-term foreign and local currency sovereign credit ratings on the Republic of Nigeria to ‘BB-‘ from ‘B+’ on improved fiscal and external buffers and strong growth.
“The upgrade reflects our view that owing to fuel subsidy cuts, conservative budget oil price assumptions, improving fiscal management, and high prices, Nigeria’s fiscal assets in its excess crude account (ECA) have risen to US$8.4 billion (from US$2.0 billion at end-2010), which provides a reasonable fiscal buffer,” Standard & Poor’s Rating Services said in a statement.
It added that external buffers have also been rising on the back of high oil prices and strong exports, with foreign reserves standing at just above US$42 billion as of Nov. 1, 2012.
Other rating actions by the firm include an affirmation of the ‘B’ foreign- and local-currency short-term ratings. It also raised the long-term national scale rating to ‘ngAA-‘ from ‘ngA+’, affirmed the short-term national scale rating at ‘ngA-1’ and revised the transfer and convertibility (T&C) assessment to ‘BB-‘ from B+.
The agency also raised its long-term foreign and local-currency sovereign credit ratings on Nigeria by one notch to ‘BB-‘ on the basis that the government has sustained reform momentum in several key areas including cutting the fuel subsidy and reforming the power sector, and the authorities have restructured and strengthened the previously troubled banking sector.
“The stable outlook assumes that the government will continue to pursue its reforms, thereby helping to support strong economic growth, and that there will be no worsening of political tensions and no significant return of insurgency in the Niger Delta,” it said.
The firm said it could consider raising the ratings if the authorities consistently improve fiscal performance and significantly enhances foreign currency reserves. If transparency in the oil sector and on the fiscal and external accounts improves, and if institutional capacities strengthen, thereby converging with higher rated peers.
“We could consider lowering the ratings if fiscal and external balances deteriorate, for example as a consequence of a sharp drop in oil production or prices. Downward pressure could also build if reforms stagnate, growth falters, or political tensions or violence increase substantially” the firm said.