Fitch Affirms Nigeria at 'BB-'; Outlook Stable

Fitch Ratings has affirmed Nigeria's Long-term foreign and local currency IDRs and senior unsecured bond ratings at 'BB-' and  'BB' respectively. The Outlook is Stable. The agency has also affirmed Nigeria's
Short-term foreign currency IDR at 'B' and Country Ceiling at 'BB-'.

KEY RATING DRIVERS

The affirmation reflects the following key rating drivers:

Nigeria finmin, Okonjo-Iweala

GDP growth slowed to 6.4 percent in the first six months of 2013 but has shown resilience in the face of  exogenous shocks: severe floods in 2012 which hit agricultural output; security  problems especially in the north earlier this year; and increased oil theft and  vandalism and the consequent repair shutdowns which have caused oil output to
contract for the second year in a row. The non-oil economy has slowed but still  grew by 7.9% in 2012 and 7.6 percent in the first half of 2013. Non-oil growth should pick-up in second half of 2013 as  normal weather has resumed and the authorities have responded to security  problems. Reforms to the electricity and agriculture sectors could start to
boost potential growth.  
Inflation has been in single digits all year - the lowest in five years and the longest stretch of single digit inflation since 2008. Policy rates are unchanged. The central bank (CBN) has the twin aims of achieving single-digit  inflation and maintaining exchange rate stability.
 Public finances remain comfortable. Fitch estimates a general government deficit of around 1.8 percent of GDP this year and next. Both oil and non-oil revenues are  under-budget and the Excess Crude Account (ECA) has been tapped to compensate.
Capital spending also remains under budget. The draft 2014 budget plans  ambitious fiscal consolidation, with lower oil production and benchmark oil  prices and lower spending than the 2013 budget. However, Fitch expects that oil  production will likely fall short again, and the final budget that emerges from  the National Assembly (NA) is likely to be more expansionary. Nevertheless,  Fitch expects general government debt to remain stable at just over 20 percent of GDP, barely half that of peers.
Nigeria's sovereign and overall external balance sheets, current account surplus, debt service ratio and external liquidity are all stronger than 'BB' category medians. Foreign reserves rose steadily in early 2013 but have been  falling since May due to reduced oil output, prompting ECA drawdown, and global  market turbulence, which has reduced foreign appetite for NGN paper (though net  inflows have continued).
CBN intervened to support the naira when it came under  pressure mid-year after Fed-tapering turbulence, although reserves have held up  much better than many large emerging markets. Nigeria effectively re-opened the  Eurobond market in July, raising USD1bn in its second issuance.
 Reform progress remains mixed. Electricity privatisation has passed a key  milestone with generators and distributors now in private hands. Output seems to  be on a rising trend, although it has been affected by gas pipeline damage and  an impact on GDP growth is hard to discern.
Agricultural reforms are also  gaining traction. The most obvious benefit to the economy has been a fall in
imports last year, due to reduced oil subsidy payments, a crackdown on fraud in the oil subsidy system and substitution in the agricultural sector.
However, the Petroleum Industry Bill (PIB) remains stalled in the NA. Strong vested interests will make structural reform a continual struggle, especially with elections in 2015.
Nigeria's ratings remain constrained by weak governance, low per capita income and vulnerability to oil price volatility.
The government is responding to the Boko Haram insurgency mainly with security measures. Data weaknesses hamper the monitoring of economic and fiscal performance and reform progress.

RATING SENSITIVITIES

The Stable Outlook reflects the fact that in Fitch's view, upside and downside risks are well balanced. The main factors that individually or collectively might lead to rating action are as follows:

Positive:

- Continuing structural reforms that brought faster, more diverse and inclusive growth and higher employment and per capita incomes.

- A longer track record of low single-digit inflation.

- Improved external buffers, either in the ECA or the new Sovereign Wealth Fund (NSIA).

- Improved governance as reflected in World Bank and anti-corruption indicators.

Negative:

- A sustained period of lower oil prices or oil production and an inappropriate policy response, leading to serious reserve loss and deterioration in the fiscal position.

- Reversal of key structural reforms.

A serious deterioration in domestic security, whether stemming from terrorism or election-related violence.  

KEY ASSUMPTIONS

Nigeria is highly dependent on oil for fiscal and external revenue. Fitch assumes Brent crude will average USD105/bl in 2013 and USD100/bl in 2014 and  2015.

Fitch assumes the current stance of relatively conservative macro policy and incremental structural reform will remain in place in the forecast period, which goes up to the election year of 2015.
However, no significant acceleration in non-oil growth or net exports has been assumed nor any further reduction in petroleum subsidies, which would benefit public and external finances.
 No specific assumption is made about passage of the PIB before the election, but failure to do so is assumed not to have any serious short-term impact on oil production. However, oil theft and associated capacity shutdowns are assumed to continue, although not to worsen, meaning average oil output will remain
significantly below potential of 2.6mb/d. It is also assumed that there is no major resurgence of violence in the Delta region.
The Boko Haram terrorist insurgency is assumed to remain contained and not to
have serious consequences for economic performance.