Fitch Affirms Nigeria's Rivers State at 'BB-'; Outlook Stable

Fitch Ratings has affirmed Rivers State's Long-term foreign and local currency ratings at 'BB-' and National Long-term rating at 'AA-(nga)'. The Outlooks are Stable.

KEY RATING DRIVERS

Rivers Gov, Ameachi

The affirmation reflects Fitch's expectations of the state's continuing stable performance, improving transparency, high capital spending as well as rising financial debt in in light of weak socio-economic indicators by international standards.
Under Fitch's base case scenario, the operating margin stabilises around 65 percent in 2013-2015 due to growing revenues and cost moderation. Disruptions in oil production may be partially offset by a higher budgeted benchmark oil price of  $79 per barrel (pb) in 2013 from $70 in 2012 and market oil prices around $100 pb. The eventual full removal of the fuel subsidy and/or the likely replacement of the excess crude with revenues from the Sovereign Wealth Fund could push oil proceeds to N280 billion by 2015 from N223 billion in 2012.
Fitch expects internally generated revenues to gradually grow to N100 billion by 2015 from N65 billion in 2012, eventually representing about 30 percent of annual income, up from 20 percent in 2010-2012 due to the introduction of biometrics and tax harmonisation bills. Although increasing social services such as education could potentially add pressure to the state's budget, Fitch expects the administration's commitment to moderate costs to limit their growth to N140 billion by 2015 from N100 billion in 2012, or 10 percent a year, roughly in line with inflation.
Fitch expects the state to continue investing in building hospitals and schools, power generation and rural electrification. Therefore the base case scenario envisages capital spending above N200 billion a year in 2013-2015 with debt funding about 10 percent. Financial debt may therefore grow to about N150 billion by 2015 from N82.5 billion in 2012, while the debt and debt service coverage ratios remain strong below one year of the current balance, and above 2.5x the operating balance, respectively, when both interest and principal repayment/provisions are considered.

RATING SENSITIVITIES
The ratings could be downgraded if the operating margin declines below 50 percent amid a resurgence of restiveness in the Niger Delta region while financial debt rises beyond Fitch's expectations. Conversely, local taxes developing beyond Fitch's expectations and improvements in governance could lead to an upgrade.