The upgrade on Nigeria’s rating by Fitch Rating Agency will definitely give the authorities reason to beat their chests and smile benignly like popes, congratulating themselves. And that they have been doing gleefully the minute the news broke. The flip side is that how does it affect the economy, the banking industry and more importantly the ordinary people on the street.
For many, moving Nigeria to a stable, though still at BB-, signifies some steps in the right direction, but still very far from saying it’s uhuru.
The rating agency notes that overall fiscal policy at the consolidated government level is still relatively loose, with overall spending still high, making monetary and exchange rate policy more challenging.
“Proposals to base the 2012 budget on a lower benchmark oil price are therefore encouraging, although the ultimate fiscal stance will depend on the budget that emerges from the National Assembly”, it said.
Although international reserves have stabilised, they have not picked up despite higher oil prices and production owing to high fiscal spending, including the large fuel subsidy, as well as negative real interest rates and private forex demand, the agency said.
This is a negative for Nigeria compared with other oil producers which have rebuilt reserves over the past two years. Increased pressure on the currency due to global risk aversion prompted the Central Bank of Nigeria (CBN) to increase interest rates sharply by 275 bps in early October (bringing the overall increase in interest rates since September 2010 to 600 bps) to stabilise the exchange rate and restore confidence.
This also restored positive real interest rates, which will help bear down on still relatively high inflation. However, fiscal reforms will ultimately need to be part of the solution to rebuild Nigeria’s reserves and reduce pressure on the currency and interest rates. It added that passage of the long-delayed Petroleum Investment Bill would be positive in this respect, as well as reducing uncertainty regarding the energy sector investment regime.
It warned that in future, a sharp and sustained fall in oil prices or a decline in reserves owing to renewed fiscal slippage are the likely main sources of downward pressure on the ratings.
The recent positive rating of Nigeria by Fitch, the global rating agency is however an endorsement of the current government. Apart from revising Nigeria’s rating outlook to stable, Fitch also affirmed Nigeria’s long-term foreign currency Issuer Default Rating (IDR) at ‘BB-’ and Long-term local currency IDR at ‘BB’. The agency also affirmed the Short-term rating at ‘B’ and Country Ceiling at ‘BB’.
Coming just barely a year after a rating downgrade berated the country for depletion of its foreign reserves and uncertainties over the 2011 elections, the reversal says a lot about the ongoing push by government to improve the economy.
Victoria Kalema, a Director in the rating agency’s Sovereign Group stated that, “The revision of the Outlook on Nigeria’s ratings to Stable from Negative reflects an improved outlook for reforms following elections in April and the appointment of a strong economic team.”
She argues that with continued reforms in progress, a tighter budget for 2012, as well as moves towards scrapping the petroleum subsidy and the establishment of the sovereign wealth fund, all point to a strong economy.
The ratings agency also indicated that it would further lower its assessment of Nigeria’s economic prospects if the country did not follow through with post-election reforms. The aftermath of the elections has seen government demonstrate a resolve to put things right and do things the right way. This is the summation of the Fitch endorsement.
According to Fitch, the deterioration in reserves has halted as the Central Bank of Nigeria (CBN) has adopted tighter monetary policy while the government has adopted fiscal discipline. Thus, Nigeria’s foreign reserves which hit a low of $30 billion a couple of weeks ago has shored up to $33 billion. In addition, the CBN has initiated several policies in its bid to arrest the decline of the naira.
Rating to ordinary Nigerian
This, certainly, comes as a pat on the back for the government. Finance Minister and Coordinating Minister for the Economy, Dr Ngozi Okonjo-Iweala, said that the upgrade of Nigeria’s economic outlook by Fitch Ratings has laid a strong foundation on which the Federal Government can build the economic reforms and implement the transformation agenda of President Goodluck Jonathan.
She describes the upgrade as “a great news for the country and a strong foundation for the country to keep building the ongoing economic reforms”.
However, to the ordinary Nigerian, this positive outlook means little. With over 50 per cent of the population still reeling under the weight of poverty, the improved rating may just be a farce. Despite the consistent rise in gross domestic product (GDP) by over 5 per cent in the last four years, the impact is still not reflecting in the lives of the people.
According to Samsudeen Usman, minister for National Planning, the level of poverty is a concern to government. While vouching for the accuracy of the statistics, he blamed the social inequality in the country for rising poverty in the midst of economic growth.
“It is a growth that has not generated the commensurate level of employment and that is why we have the high level of unemployment that is particularly worse for some age groups. The 15 to 35 years age groups have the highest level of unemployment.” He said the growth pattern of the economy was not desirable.
He blamed the alienation of many Nigerians out of the prosperity radar to the inconsistency in government policy formulation and implementation over the years, which has put the pressure on the citizens. “The whole thing is about continuity. India today is going through its 12th five year development plan and that is the whole idea behind Indian technology.”
In the same vein, the Fitch report places economic reforms at the core of any further improvement in rating. David Adonri, managing director of Lambeth Trust and Investment Limited, a Lagos based investment firm said recent moves by government to reform some sectors certainly bodes well and is a justification for the improved rating. “Improvement in power generation indicates that the ordinary Nigerian is already feeling the impact of the improved ratings. The issue of inflation has been curtailed which has not put too much strain on the purchasing power of the ordinary Nigerian.”
According to him, the current effort by government to deregulate the downstream sector of the Petroleum industry is also capable of unleashing massive improvement in the economic outlook. “Deregulation though may initially fuel inflation, that may be counterbalanced by the increase in employment that will be derived from funds that will be saved from subsidy.” He believes that the new rating is justified and called for government to do more to make it relevant to the ordinary man on the street.
Ease of doing business
One thing the government must work on if the reforms are to yield visible results is that the bottlenecks on doing business in the country must be addressed and quickly too. Analysts believe that one of the de-linkages in the economy that has prevented the improvement in the economy to trickle down is the ease of doing business index which places Nigeria at the lowest rung of the ladder. A World Bank report ranks Nigeria 133 out of 183 economies for 2011 and 2012. This places the country in clear disadvantage in attracting foreign direct investment which is central to the desired improvement in the economy.
But Frank Nweke Jr., director general of the Nigerian Economic Summit Group (NESG) says the country is also showing signs of improvement in this regards. He said recent development to improve efficiency at the ports were a pointer to the sincerity of government to improve the business climate.
“We are already engaging government on the issue of ease of doing business. All the recommendations we have made on education, healthcare and infrastructure impact ease of doing business. The recent profound step through the Economic Management Team by removing about 20 agencies from the port impacts ease of doing business. There is no way it will not have impact if it is implemented,” he said.
In addition, the various reforms in the agriculture sector, which currently accounts for about 42 per cent of the country’s GDP is capable of improving rural income, thus positively affecting the lives of Nigerians.
Fitch believes that the planned reforms to the agriculture sector would improve output and productivity and increase rural incomes, with a huge medium- term positive impact on the economy, even if they are only partially implemented.
Rhetoric of statistics
There are others that believe that beyond the rhetoric of statistics, government must ensure that the informal sector is adequately captured by any government reform policy. Samuel Nzekwu, former president of the Association of National Accountants of Nigeria, said bandying figures around does not make much meaning to the ordinary man on the street. “What are they using to measure? In all of this did they capture the informal sector?” According to him, the informal sector provides a missing link. He said even though the economy is going through some rejuvenation, the gains there would be of more benefit if government achieved the target to improve power supply, security and infrastructure.
Overall, Fitch’s opinion is that Nigeria’s key credit indicators - strong growth, low public debt (currently put at less than 18 per cent of GDP) and a strong foreign reserve provide strong justification for the current improved rating. The ordinary Nigerian may, however, be at pains to readily find succour in this.
Implication for banks
With the successful bailing out of the rescued banks by the Asset Management Corporation of Nigeria (AMCON), the banking industry’s liquidity have improved reasonably, and the huge Non-Performing Loans (NPLs) reduced to manageable levels.
The implication of this is that, banks will require more capital to enable them have competitive edge. Fitch Ratings said, those with higher level of capital will have the advantage, particularly as banks will now compete for deposits.
The rating agency added that higher levels of capital were appropriate for Nigerian banks in the light of the difficult local operating environment.
Fitch Ratings also argued that considering the difficulties in raising fresh capital since the banking crisis, banks that hold higher levels of Tier 1 capital are better placed to grow, even as it anticipated that the financial performance as well as its rating of most Nigerian banks would improve this year as a result of lower impairment charges and funding costs, as reported by Reuters.
Following the successful recapitalisation of the rescued banks, the Central Bank of Nigeria had said the average Capital Adequacy Ratio (CAR) of all the banks operating in Nigeria had risen significantly to 17.12 per cent. Banks’ CAR had fallen below 10 per cent – the industry’s average, as at June last year.
CAR is a measure of a bank’s capital. It is expressed as a percentage of a bank’s risk weighted credit exposures. Two types of capital are measured: tier one capital, which can absorb losses without a bank being required to cease trading, and tier two capital, which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Latest third quarter results released by banks so far had shown a trend of improved, more stable earnings due to significantly lower impairment charges compared with 2009 and 2010. The banks’ nine month reports as at September 30, 2011, also reflected some strong demand for banking services, after prolonged uncertainty with cost management expected to now be the focus of banks.
Fitch said that over the medium-term, higher levels of credit growth, non-interest income and a greater cost management focus may support banks’ earnings as the competition for lower-cost deposits intensifies.
“Fitch notes that the asset quality indicators of Nigerian banks benefited from the sale of non-performing loans (NPLs) to the Asset Management Corporation of Nigeria during 2010 and third quarter. In addition, banks proactively used restructuring as a risk management tool to offset the negative impact of further NPL inflows on asset quality indicators”, it added.