Nigeria’s rating lowered by S&P as oil, politics hit economy

Nigeria’s credit rating was downgraded by Standard & Poor’s on Friday because of falling oil prices and rising political risks before delayed elections due next week in the West African country.

The foreign and local currency long-term rating was cut one level to B+, four levels below investment grade. The outlook was changed to stable

The decline in oil prices in the last seven months has significantly affected Nigeria’s external position and external vulnerability,” S&P said in a statement. “The tightly contested general elections may pose risks to Nigeria’s external position and the implementation of what we view as the government’s ambitious fiscal consolidation plans, while the Boko Haram group continues to disrupt the northeast.”

Africa’s largest economy, which derives 90 percent of export earnings and 70 percent of government revenue from oil, is struggling with Brent crude prices having halved since June. The International Monetary Fund predicts growth of 4.8 percent this year, down from 6.3 percent in 2014. The naira has weakened 18 percent in the past six months, the most after Zambia’s kwacha among 24 African currencies tracked by Bloomberg.

“Despite Nigeria’s relatively-diversified economy, its fiscal revenue and export dependence on oil continues to be a key vulnerability,” Razia Khan, head of Africa economic research at Standard Chartered Plc in London, said in e-mailed comments after the downgrade. “The extent of that vulnerability has been exposed by weak fiscal buffers and subsequent pressure on its foreign exchange reserves.”

Postponed Election

Electoral officials delayed a presidential poll set for Feb. 14 by six weeks after President Goodluck Jonathan’s security adviser said the army couldn’t guarantee voters’ safety in the northeast, where a six-year insurgency by Islamist group Boko Haram has killed thousands. Jonathan will face former military dictator Muhammadu Buhari in what is set to be the closest election since Nigeria ended military rule in 1999.

“A downgrade worsens public and investor perception of the economy hit by a fall in oil prices, reserves and the local currency,” Kunle Ezun, an analyst at Ecobank Transnational Inc. in Lagos, said by phone before the S&P decision. It could increase the borrowing costs of the federal government and Nigeria’s 36 states, he said.

Fitch Ratings will publish a review on its BB- rating for Nigeria, which has a stable outlook, on March 27, the eve of the vote. Moody’s Investors Service also has a stable outlook for the country and rates it Ba3, the same as Fitch.

Yields on Nigeria’s Eurobonds due July 2023 fell 9 basis points to 6.8 percent at 5:46 p.m. in London.

ANALYSIS

By Mark Amaza

Fuelfix