Analysts at rating agencies have listed some initiatives
that they will like to see in Nigeria that will help the country achieve an
investment grade credit rating. They believe if these initiatives are put in
place, Nigeria is one of the few African countries with the potential to attain
an investment grade credit rating in the next 10 years.
Sanusi Lamido Sanusi, Governor, Central Bank of Nigeria.
Credit ratings usually reflect an opinion by a credit rating
agency of an issuer’s capacity to meet its debt obligation when they fall due.
Fitch rating currently rates Nigeria BB- while Standard and Poor’s
gives Nigeria a credit rating of B+/B which is three steps away from the
minimum investment grade credit rating. A B+ rating is classified as a
speculative grade by S&P which means that “is more vulnerable than
obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial and
economic conditions will likely impair the obligor’s capacity or willingness to
meet its financial commitment on the obligation”
A “B” rating is just grade above the C category of ratings
which essentially means that a bond is junk and almost in default. For Nigeria,
to move to the investment grade credit rating, it has to move a minimum of
three steps upward in rating to an A credit rating which is the minimum credit
rating on the S&P country credit rating scale.
“Debt issues that are rated as having higher credit quality
are commonly referred to as investment-grade securities. Those that are
assessed to have a relatively lower credit quality are often referred to as
non-investment-grade, or sometimes speculative grade, securities. The term
“investment grade” initially identified debt securities that bank regulators
and market participants viewed as suitable investments for institutions such as
banks, insurance companies, and savings and loan associations” according to information on the website of
Standard and Poor’s.
Basically, If Nigeria and other African countries can attain
an investment grade credit rating; it would make the country’s debts eligible
for investment from a wider range of investors. This has the potential of
reducing the cost of borrowing in the international markets for both the
country and companies operating in the country that may seek to borrow in the
international capital markets.
Nigeria’s “B” rating put it in what analysts in the
investment community call the “Trash ratio” category. Investors are usually
restricted to just about 10% of their portfolio in any issue of countries in
this category to reduce the risk of their exposure.
About 30 African countries are currently rated by Fitch
ratings and S&P but none is rated as investment grade. So at this year’s 2nd
African Debt Capital Markets conference at the London Stock Exchange organised
by the IC Group, publishers of African Banker and other pan African magazines,
this blogger asked a key official of a rating agency what it would take for Nigeria to attain an investment grade credit
rating.
He suggests Nigeria will need to get inflation into single
digits on a sustainable basis. Nigeria’s inflation figures in the last few
years have hovered in the 10% to 20% range and in most cases trending upwards.
There is a need to see appropriate policy response to
external reserve losses in periods of rapid fall in crude oil prices. An
appropriate policy response that leads to a stronger reserve cushion will help
to improve Nigeria credit rating. In this direction, he says, it is good news
to hear that the State governments have agreed to the adoption of the Sovereign
Wealth Fund (SWF)
He also sees as positive the reforms being pursued by
Nigeria in the power sector. It would help the country credit rating if the Nigerian
government get the reforms in the electricity sector right. He believes that
getting the power sector reforms right could boost economic growth and improve
Nigeria’s economic outlook.
It would also help if the federal government is able to
tackle corruption. This will mean the government taking concrete and
transparent steps to reduce significantly the incidence of corruption
especially in the public sector.
For more information on credit rating click here
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