Fitch expresses reservations despite Nigeria’s smooth transition

By Sola Alabadan / News Editor, Sunday


Fitch Ratings Ltd says the prospect of a smooth transfer of power in Nigeria alters but does not remove risks to the country’s sovereign credit profile related to March’s elections. This comes as Muhammadu Buhari of the All Progressives Congress (APC) is to succeed the incumbent Goodluck Jonathan as president on May 29.

According to a statement released by the rating agency in London on Thursday, “A change of government introduces economic policy uncertainty following smooth elections and the authorities’ proactive response to lower oil prices this year.”

Fitch, however, acknowledged that “the first transition from an elected ruling party to an opposition party, via a smoother and more credible electoral process than was widely expected, is positive for Nigeria and suggests that the country’s democratic institutions are getting stronger (governance indicators are much weaker than the ‘BB’ rating category medians).”

Nonetheless, the rating agency raised alarm that “tensions may yet reignite in the Delta region and Boko Haram continues to disrupt economic and political activity in the north east. The advent of a new government creates uncertainty about its economic policy.”

Fitch’s Director Sovereigns, Paul Gamble, said that economic issues did not feature prominently in the election campaign and Fitch assumes that the APC will not deviate fundamentally from the policies of the previous administration, maintaining a long-standing focus on areas such as oil, power and agriculture sector reform. “But there is uncertainty about the details.”

“President-elect Buhari’s economic team has yet to take shape and will be untested after 16 years of Peoples Democratic Party governments. If there were a hiatus or rethink in economic policy, it could delay a return of foreign portfolio inflows and the corresponding support for the exchange rate. Prior to the elections, the Nigerian authorities mounted a rapid response to the challenges of lower oil prices, compounded by capital outflows,” the rating agency further noted.






Fitch added that “The oil price assumed in the budget has been cut to $53/b for 2015 and cost-saving and revenue-raising measures have been introduced. Plans to extend successful existing programmes, such as improving tax administration and expenditure monitoring, suggest that the envisaged consolidation is achievable, and we forecast little change in the general government deficit in 2015.

“It remains to be seen if the new government will affirm the commitment to these or equivalent fiscal measures, as well as the previously planned post-election increase in VAT. Reform of the currency regime and an effective 18 percent devaluation in February eased pressure on the naira, which has firmed in the unofficial market since the elections.

Another managed fall in the currency would stabilise reserves, which have fallen below $30 billion (or less than four months of import cover) and blunt the budgetary impact of cheaper oil. “Our end-2015 forecast of N210 naira to the US dollar assumes such an exchange-rate adjustment, which would encourage a return of foreign capital and support the balance of payments. The policy response was prompted by Nigeria’s weaker external and fiscal buffers compared with the 2008-2009 oil shock.”

Having revised the Outlook on Nigeria’s ‘BB-’ rating to Negative in March, Fitch said that it may comment further as economic policy develops, pointing out that its next scheduled review of Nigeria’s ratings is on September 25.

Source : Independent

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