beyondbrics

Nigeria’s resolve to maintain currency stability and push ahead with economic reforms to combat inflation (as seen in the unexpected 275 basis points rate rise to 12 per cent on October 10) have been rewarded – just a little.

The country’s outlook is now stable, according to ratings agency Fitch (who had put the country on negative watch in Oct 2010) – but reliance on oil revenues and its relatively weak foreign reserves could still haul it back down.

Fitch’s new-found optimism stems from from the prospect of reforms following April’s elections and the subsequent appointment of “a strong economic team”. A tighter monetary policy, an increasingly stable (if still uncertain) foreign exchange position, the planned scrapping of an expensive fuel subsidy and expectations of a tighter budget next year also helped.

As Fitch noted when confirming the country’s ‘BB-’ rating,  Nigeria’s fundamentals are strong:

Nigeria’s key credit indicators – strong growth, low public debt and a strong external balance sheet – continue to provide strong support to the rating. Fitch expects Nigeria to sustain its high growth rates of 7%-8%, which are far higher than the ‘BB’ five-year median of 4.4%, as a result of the planned reforms, continued recovery of oil production and strong domestic demand. At 17.8% of GDP at the end of 2010, public debt is far below the ‘BB’ median of 41%… Despite a weakening in the sovereign’s balance sheet due to the decline of FX reserves in 2009 and 2010, it remains stronger than the ‘BB’ median.

But, unlike other oil-rich countries Nigeria has not built  up a strong international reserve position. Fitch argues that 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 FX demand.”

And, as Société Générale said in a note on Monday, “more spending is pencilled in for next year and Sanusi [Nigeria's central bank governor] has warned that the removal of the fuel subsidy may not be significant enough to bring down inflation signalling that more tightening is ahead. The effects of the subsidy removal are also partially offset by higher spending on implementing the minimum wage hike.”

Thus SocGen argue that although proposals to base the 2012 budget on a lower benchmark oil price of $70/barrel are encouraging and could point to a widening of the tax base in the future, “the ultimate fiscal stance will depend on the budget that emerges from the National Assembly. We therefore recommend staying away from FGN [Federal Government of Nigeria] bonds for now, believing yields could rise further into the new year with more tightening ahead, a volatile currency and lack of clarity as of yet over the 2012 budget”.

A very thorough ‘wait-and-see’ from everybody, then.

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