Monday, 31 October 2011

Making Nigeria ’s stable outlookmeaningful to citizens

Last week, Nigeria ’s sovereign ratings
outlook was revised to stable, from
negative, by Fitch Ratings, citing fiscal
consolidation and reforms in the various
sectors of the economy as responsible for
the new disposition.
“The revision of the Outlook on Nigeria ‘s
ratings to Stable, from Negative, reflects an
improved outlook for reforms, following
elections in April and the appointment of a
strong economic team. In addition, tighter
monetary policy and slightly better fiscal
discipline have arrested the rapid pace of
reserves decline seen in the first three
quarters of 2010, which had prompted the
Negative Outlook in October last year,” says
Veronica Kalema, a Director in Fitch’s
Sovereign group.
The Stable Outlook anticipates continued
reforms progress, a tighter budget for
2012, including progress towards scrapping
the petroleum subsidy and making Nigeria
Sovereign Investment Authority, the
sovereign wealth fund, operational.”
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.
Since then government and analysts have
been celebrating, saying it is a sign of
confidence in the ongoing reforms and also
that it is capable of increasing foreign fund
managers’ interests in her financial
Rated entities in a number of sectors,
including financial and non-financial
corporations, sovereigns and insurance
companies, are generally assigned Issuer
Default Ratings (IDRs) on the entity’s relative
vulnerability to default on financial
obligations. The “threshold” default risk
addressed by the IDR is generally that of the
financial obligations whose non-payment
would best reflect the uncured failure of
that entity.
Fitch Ratings had lowered Nigeria ’s
sovereign credit outlook to Negative last
October from Stable, citing the depletion of
its windfall oil savings and heightened
political uncertainty, ahead of elections at
the time.
But, even as government and some analysts
are celebrating, others are asking of the
relevance of the upgrade to the citizens, in
terms of disposable income, cost of doing
business, exchange rate and interest rate
among others.
“The upgrsde is okay, but how has this
translated into improved living standard,
how has government’s large spending
positively affected my life of how have the
banking sector reforms improved access to
credit by the private sector or citizens, apart
from big corporations and high networth
individuals?”, querries Mustapha Sulaiman, a
chartered stock broker. Wale Abe, Executive
Secretary, Financial Market Dealers
Association of Nigeria commended the
upgrade but worried whether those
indicators used by Fitch would finally
translate into a better Nigerian economy.
Abe was optimistic that the finance minister,
based on her past records, would likely pull
through the implementation of those
economic reforms, but noted government’s
plans to cut down recurrent expenditure by
just 4 percent within four years, as not “just
exciting.” Ngozi Okonj-Iweala, the
Coordinating Minister for the Economy/
Minister of Finance, attributed the upgrade
to government’s determination to embark
on some strategic structural reforms,
particularly fiscal consolidation.
Okonjo-Iweala, described the upgrading
as“Great news for the country and a strong
foundation for the country to keep building
the ongoing economic reforms”.
“Fitch did this because of the medium term
budget of fiscal consolidation proposed by
the Ministry of Finance, in line with the
transformation agenda,” the economic
coordinating minister commented.
“We have to keep working hard to realise
the key priorities of the transformation
agenda – job creation and building key
infrastructure. But this positive
development gives us a strong foundation
to build on,” she added. But, some
stakeholders are of the opinion that a lot
needs to be done to make Nigerians benefit
from the positive outlook. They posited that
Nigeria should leverage on her natural
endowments to improve productivity in
other sectors and competitiveness,adding
that the current cost of doing business in
the country is still prohibitive and therefore
does not in any way make the positive
outlook to Nigerians.
Apart from the positive outlook, the agency
also affirmed Nigeria ’s long-term foreign
currency Issuer Default Rating (IDR) at ‘BB-’
and Long-term local currency IDR at ‘BB’. The
agency also affirmed the Short-term rating
at ‘B’ and Country Ceiling at ‘BB’. Fitch
Ratings had lowered Nigeria ’s sovereign
credit outlook to Negative last October from
Stable, citing the depletion of its windfall oil
savings and heightened political uncertainty
ahead of elections at the time.
The ratings agency had also indicated that it
would further lower its assessment of
Nigeria ’s economic prospects if the country
did not follow through with post-election
reforms to put the economy on a
sustainable path.
Johnson Chukwu, managing director/chief
executive officer, Cowry Asset management
limited said the rating is a good
development saying that by the time fuel
subsidy is removed and power sector
reforms take shape, Nigeria’s rating will
improve and that there are signs to agree
with the report that the outlook is stable.
Oby Ezekwesili, vice president, World Bank,
said although it progress of some sort, it
does not call for celebration when other
countries are getting triple As.
Ezekwesili, a former minister of education
and solid minerals, was of the opinion that a
lot needs to be done to make Nigrians feel
part of the upgrade.
She said, for instance, that private sector
cannot come into an economy where there
is negative rating; it cannot come into a
country where there is infrastructure
deficiency and where the cost of
transaction is too high. They will not come
into a country that has a key bottleneck and
in an environment with many hurdles in
doing business.
And so government has to focus on things
that will improve the business climate. Some
of those things include the bulk
bureaucratic reforms that have been going
on, but the most important is having a
macro economic stability that will ensure
that your fiscal activities are well ordered,
prudential and your monetary policy is such
that checks inflation, guaranty stability and
prohibits exchange rate volatility, so that
such stability will make investors take you
serious when making investment decision.
So, in order to address the infrastructure
deficit, the role of government and private
sector will become complementary.
“In terms of additional financing in an
annual basis that is needed, at least more
than $25 billion is needed to address
infrastructure; you can find private sector
and government sharing the risk that is
involved in it.”
Commenting on the fiscal problem facing
the country, Ezekwesili, said: “Well, it has to
do with fiscal consolidation of the budget.
By fiscal consolidation, we mean taking
hard fiscal responsibility in our budget. The
entire budget has to be looked at, not just
the size alone but the quality and structure
of the budget.
“There is urgent need to reduce the portion
of the recurrent expenditure of the
government, it is really urgent for
government to do so because no economy
can develop its infrastructure with the kind
of budget we have. It does not create the
basis of economic growth. The bride of
economic growth is the investment in
infrastructure and human capital for an
overall economic growth.
The part of fiscal consolidation really must
be considered. The government must live
within its means and it should not crowd
out the private sector by borrowing from
the domestic market where resources are
available for the development of the real
sector that has potentials for employment.
Commenting on the banking sector reforms
which the agency said was one of the
reasons for the upgrade, she said, “these
are early days we have to focus on both
monetary and fiscal policies. The monetary
authority has to keep focus on improving
the performance of the banking sector. The
most important thing is to ensure that credit
is revitalized in the system to reactivate the
real sector, because that is where the job
creation has to come from.
Some of the measures that are being taken
are on course but the high cost of doing
business by the Small Medium Scale
Enterprises (SMEs) is not just from the
lending aspect but from other transaction
costs, such as transport, energy, etc. So by
the time you reduce all the transaction costs
then there will be a balance when you
consider the cost of borrowing.”
MONDAY, 31 OCTOBER 2011 00:00

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