Fitch rates Lagos economy stable

Fitch Ratings, global rating agency has affirmed Lagos State's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB-' with Stable Outlooks and its Short-term foreign IDR at 'B'.

The agency has simultaneously affirmed the National Long-term rating at 'AA(nga)' with Positive Outlook as well as the Long-term ratings of 'BB-' and 'AA(nga)' of its N275 billion MTN programme as well as its N57.5 billion and N80 billion bonds, maturing in 2017 and 2019 respectively.

The affirmation reflects the state's weak socio-economic indicators by international standards, which could eventually put the state's social spending under pressure, notably on health and education.

The ratings also reflect Fitch's expectations of the state's continuing solid operating performance and efforts towards an increasingly sophisticated and transparent administration, which is conducive to growing private sector investments.

This should contribute to balancing the budget by 2015, with stable debt coverage by the current balance of around three years.

Fitch expects Lagos' revenue to remain highly diversified compared with the national average, due to forecast internal generated revenues (IGR) growing above N400 billion by 2015, or 80 per cent of total revenue, from about N200 billion or 70 per cent in 2010 .

Under Fitch's base case scenario, Lagos' operating margin will remain around 50 per cent in the medium term, supported by growing local taxes, and the administration's commitment to moderate cost growth.

Plans to broaden the tax base while improving collection methods could boost local tax receipts to N330 billion by 2015, up from N185 billion in 2012.

Fitch expects capital spending to remain at N250 billion per year in 2014 and 2015 as the state continues to invest in transport, water, health, education and social protection, in line with the levels recorded in 2013 (according to the revised 2013 budget).

With a policy aimed at attracting private sector investment, Fitch believes the state could continue narrowing the deficit to achieve a balanced budget in 2015, from a peak deficit of 25 per cent of revenues in 2010.

Under Fitch's base case scenario Lagos' debt will stabilise at N350 billion by 2015, net of repayment provisions, with bonds representing about 50per cent of total debt, up from about 30 per cent in 2009 and long-term debt accounting for about 75 per cent of total debt.

These figures, if materialised, will reflect improving debt management with fixed repayment schedules, longer maturities and monthly provisions into debt reserve funds.

 The ratings could be upgraded if improvements in the budgetary performance lead to debt stabilising below N0.5 trillion, while maintaining a high 30 per cent component of subsidised foreign loans, lowering the debt servicing burden. Continued growth of the local economy resulting in taxes remaining around 75 per cent of total revenues would also be positive for the ratings.