S&P downgrades Nigeria economy as oil price and poll risks take tolls

Standard & Poor’s, a London based independent ratings service has downgraded the nation’s credit rating to B+ from BB-, citing the impact of seven months of declining oil prices and rising political tensions on Africa’s biggest economy.

The rating agency, which had put the country on negative credit watch in February, also cited risks posed to ambitious fiscal consolidation plans by tense forthcoming elections, and the continuing insurgency by Boko Haram extremists in the northeast of the country.

The national assembly recently dropped the 2015 budgeted price for oil, on which the state depends typically for around 70 per cent of revenues, from $65 a barrel to $53.

However, S&P director of sovereign and international public finance, Ravi Bhatia, said close results could make it “harder to push through the austerity budget.”

“In our view, the decline in oil prices in the last seven months has significantly affected Nigeria’s external position and external vulnerability. We expect that the 2010-14 surplus on the current account will turn to an average deficit of 1.8 per cent of Gross Domestic Products(GDP) in 2015-2018,” S&P said.

The agency gave the rating a stable outlook, saying that Nigeria’s non-oil economy, which has grown dramatically over the past decade and a half, will continue to support economic growth and that fiscal imbalances “will not increase significantly above current expectations”.

The presidential elections due on March 28 come against the backdrop of declining revenues, a depreciating currency and rising ethnic and religious tension.

“Despite Nigeria’s relatively diversified economy, its fiscal revenue and export dependence on oil continues to be a key vulnerability. The extent of that vulnerability has been exposed by weak fiscal buffers and subsequent pressure on its FX reserves,” Razia Khan, the chief economist for Africa at Standard Chartered bank.

She said the downgrade was unlikely to affect country’s assets significantly, as the risk of any ratings action had largely been priced in already.

About $8 billion in portfolio investment has left the country in the months running up to the polls, according to central bank officials, mostly as the result of investor fears that the polls might spark violence or a constitutional crisis.

“The hope is that Nigeria will see sustained reform momentum in reaction to weaker oil prices, ultimately lessening its economic vulnerabilities. However, progress on any economic reform will only be gauged in the medium term,” Ms Khan said.