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Nigeria – Celebrating Small Victories

Policy & Execution By Bright E. Okogu

On November 6, 2012, Standard and Poor’s (S&P) rating services released the 2012 rating for Nigeria which has been raised to a score of BB- with stable outlook, from B+. Anybody familiar with S&P and their recent ratings of many countries will know that this is no mean feat considering the current turmoil in the global economy and the downgrading of so many countries in Europe and elsewhere. This means a vote of confidence in the economy and its management and serves as an objective indicator to investors that the country is an attractive investment destination. Potential lenders also take a cue from the rating when pricing their loans.

In the midst of all our current challenges in various spheres of national life and the tenor of public discourse, it is all too easy to forget the good things – small though they may be – that are happening to us. Nigerians are known as their own most vociferous critics, which is healthy for a democratic society. We should, however, not ignore positive developments when they occur. We must learn to celebrate small victories!

Now, as a country, what have we done to earn this? This upgrade by S&P comes on the back of strong fiscal policies of the government, the ongoing reforms in the power sector and ports; the ongoing revolution in the agricultural sector, and the much improved external reserves position. Specifically, the under-listed points were identified by the rating agency as strong reasons for the upgrade:

The sustained reforms across various sectors of the economy – the financial system reforms which have contributed to stabilising the banking sector, the momentum in implementation of the power roadmap, and the efforts at deregulating the petroleum sector. The removal of subsidy on petroleum products in January 2012, though only partial, sent a strong signal about the government’s seriousness with the reform agenda. If nothing else, it set the stage for the ongoing effort to block a major loophole in the nation’s finances with the tightening of the subsidy payment system. This has brought important gains to the country’s finances, as evident from the improving balances in the Excess Crude Account (ECA) and foreign reserves.

The overall improvement in fiscal management was cited by S&P as providing a reasonable fiscal buffer through the Excess Crude Account that has risen to about US$9.65 billion in December  2012, up from about US$4.4 billion just over a year ago;
Furthermore, the healthy external reserves position, at about US$45.68 billion as of mid-November 2012 – the highest is the last 32 months – was cited as being a strong buffer for the economy, and clearly the result of strong fiscal and monetary policies, as well as the relatively high oil prices and strong exports; and Confidence in the overall stability of the political system was also an important consideration. 

This is particularly gratifying and shows that, in spite of our sometimes high-decibel political debates and differences, the fundamental political structure remains viable. A non-Nigerian once remarked to this writer that Nigeria is one of the very few countries in the world where six former presidents can sit side-by-side and harmoniously with the current leader at public functions. 

S&P was not alone in rating Nigeria high. Fitch Ratings affirmed the country’s rating at ‘BB-’ with a stable outlook. Even Moody’s Rating Agency undertook an unsolicited rating exercise on Nigeria, and came up with a similar result. This positive outlook, in their own words, reflects the likelihood of an upgrade if the government’s reform initiatives are sustained, help to support economic growth, allows Nigeria to build stronger buffers, and reduce pressure on the exchange rate.

More significant in all of this is the fact that this upgrade is coming at a time when the global economic outlook is being revised downward and the sovereign rating for some other countries, including Argentina, Greece, India, Pakistan, South Africa, Spain, UK, etc. are being downgraded. Let us be very clear about it: the rating agencies are fiercely independent, and are nobody’s friend. That is the source of their strength and reputation. Therefore an upgrade is clearly an endorsement of our economic reform programmes, and should be acknowledged as such.

What does this mean for Nigeria and Nigerians? A great deal! As a country, it means increased global confidence in the Nigerian economy, which would, consequently, encourage international investors to see Nigeria as a preferred investment destination. Added to the recent inclusion of Nigeria in the JP Morgan Emerging Markets Bond Index, this improved sovereign credit rating would continue to attract bullish foreign direct investments and portfolio investments in the country. It also translates to lower costs of capital, especially for our private sector borrowers from the international capital markets as every such loan is priced on the basis of the sovereign rating as well as the individual viability of the corporate entity. The rating is thus supportive of the private sector’s key role in growing the economy.

Specifically, a corporate entity’s rating usually falls between its stand-alone credit profile (SACP) and its country’s rating, reflecting the joint influence of both the sovereign whose policy action has a bearing on the fortunes of all actors in its domain, and the corporate entity’s own qualities. The private sector’s access to the foreign debt market is also enhanced for Nigerian firms through government’s own initiatives such as the successful euro bond offer in January 2011, which established a benchmark. Nigeria’s Eurobond has consistently been trading at low yields and high premium, which has afforded a good number of Nigerian companies the opportunity to access cheap funds internationally to develop the real sector of the economy.

We cannot, however, rest on our laurels. We still have huge challenges centring on how to improve the welfare of Nigerians: in the areas of job creation; closing the infrastructure deficit (power roads, rail, etc.); improving our human development indices; improving governance, etc, and government is doing its level best to address them.  We know that ratings are not static; continued improvements in the nation’s financial position could result in further upgrades, eventually to investment grade rating, with all the benefits that go with that.

We must therefore vigorously continue to pursue this objective by staying the course on the reforms, including in the areas of power, ports, petroleum and the agricultural sector, among others; as well as continuing to build up our domestic and external buffers. We should also continue on the track of fiscal consolidation, block leakages, minimise crude oil theft, and pipeline vandalism while further tightening the subsidy payment regime before eventual deregulation.

These steps will foster inclusive growth that will translate our acknowledged sound macroeconomic indicators into prosperity and wellbeing of Nigerians. With ongoing supportive policies designed to diversify the economy through the promotion of agriculture and industry, we stand a good chance of achieving further ratings improvement for Nigeria, as well as defeating the unemployment challenge. The path to national development is never easy, but the roadmap is clear. We must persevere and stay the course.

Dr. Okogu is Director-General, Budget Office of the Federation