Standards & Poor’s Rating Services (S & P), the global rating agency, will issue a new sovereign rating for Nigeria in March 2014, according to the schedule of ratings publication obtained by The Nation yesterday.
S & P rates Nigeria BB-. Nigeria is also rated BB- by Fitch Ratings while Moody’s Investors Services rates Nigeria Ba3.
The calendar of sovereign ratings for European Middle East and Africa (EMEA) for 2014 indicated that S & P will publish two sovereign credit rating reports on Nigeria in March and September 2014.
The notification of the publication dates for the sovereign ratings was signed by Managing Director and Head of Sovereign Ratings, EMEA, Standard & Poor’s Ratings Services, Myriam Fernandez De Heredia, who also doubles as a primary credit analysts on sovereign ratings.
According to the calendar, Nigeria’s new sovereign rating report will be published in the first instance on March 21, 2014 and subsequently on September 19, 2014.
Subsequently, the global rating agency will issue new sub-national rating on Rivers State in April 11 and October 10, 2014.
The release of the credit ratings schedule for sovereign, regional and local government authorities in EMEA was sequel to the European Union (EU) Regulation on Credit Rating Agencies (EU CRA Regulation), which requires credit rating agencies that are registered in the EU to publish an annual calendar, from 2014, setting out dates for publication of sovereign ratings and related rating outlooks.
The EU CRA Regulation variously defines a “sovereign rating” as a credit rating where the entity rated is a state (nation) or a regional or local authority of a state or where the issuer of the debt or financial obligation, debt security or other financial instrument is a state or a regional or local authority of a state, or a special purpose vehicle of a state or of a regional or local authority or where the issuer is an international financial institution established by two or more states, which has the purpose of mobilizing funding and providing financial assistance for the benefit of the members of that international financial institution, which are experiencing or threatened by severe financing problems.
The EU CRA Regulation applies where the primary analyst is located in European office or a branch of European office, whether or not the rated entity is a member state or located in the EU. Standard & Poor’s EU-registered offices and their branches are London, Paris, Frankfurt, Madrid, Milan, Moscow, Stockholm, Dubai, and Johannesburg.
However, while the scheduled sovereign ratings of Germany, Belgium, France, Netherlands, Swiss Confederations, Turkey, Italy and United Kingdom were unsolicited, Nigeria’s rating, like other several African, European and Middle East countries, was solicited rating. Solicited rating, as the name implies, means that the country or benefiting authority is paying for the conduct of the rating exercise.
Fernandez De Heredia indicated that S & P intends to update its calendar quarterly to include new sovereign ratings that have been assigned as well as remove sovereign ratings that have been withdrawn during the preceding quarter.
The EU CRA regulation requires that publication dates for the ratings should be set on Fridays and publication must take place outside regulated European market hours. Deviation from the published calendar is only permitted in exceptional circumstances, to meet regulatory obligations, and would need to be accompanied by a detailed explanation.
In its latest ‘Banking Industry Country Risk Assessment (BICRA)’ which focused on Nigeria, S & P classified Nigerian economic and banking industry risks as ‘very high’ in a report that underlined fears about Nigeria’s lop-sided economic growth and wealth distribution and the changes in the banking industry.
The global rating agency rated Nigeria’s overall economic risk as eight and banking industry risk as seven on a scale of one to 10. In a breakdown of the risk assessment, S & P scored Nigeria as ‘very high risk’ in terms of economic resilience, ‘intermediate risk’ in terms of economic imbalances and ‘extremely high risk’ in terms of credit risk in the economy.
The report scored Nigeria’s banking industry’s institutional framework and competitive dynamics as ‘very high risk’ while the industry’s system-wide funding was adjudged to be of ‘intermediate risk’. The report however noted government’s support for the banking industry.
According to the report obtained by The Nation, Nigeria’s economic risk was a balance between the country’s considerable natural resources and improving economic diversification and low wealth levels, persistent political risks, and large infrastructure deficiencies.
“The economy depends, however, on oil revenues, and we consider that there is a strong potential for future asset and equity price bubbles. The main source of economic risk stems from Nigeria’s very weak payment culture and rule of law, poor underwriting standards, and high credit concentrations and foreign currency lending,” the report stated.
It explained that the economic risk score for Nigeria was based on economic resilience, economic imbalances, and credit risk in the economy.
The report noted that Nigeria’s strong economic growth and improving diversification were being held in check by oil dependence, low wealth and infrastructure deficiencies pointing out that dependence on oil has been a major catalyst for corruption.
According to the report, Nigerian economy is expected to expand by about 6.4 per cent per year through 2013-2014, which is strong in a global context. Considerable natural resources support the economy, but the non-oil economy has largely fueled growth for the past few years. Key non-oil growth sectors include agriculture, trade, and services. Positively, this should broaden economic diversification and create opportunities for the banking sector.
“Nevertheless, we expect the economy, exports, and government revenues to continuing depending on oil in the near term, which exposes domestic economic stability to oil prices. The reliance on oil is also, in our opinion, a catalyst for corruption, political interference, and internal security problems, while the majority of the population has yet to receive any real benefit. Nigeria remains a low income country, with per capita GDP that we estimate will remain below $2,000 over the next two years. Furthermore, there are significant shortcomings in physical, commercial, and legal infrastructure,” the report stated.
S & P stated that ahead of the 2015 elections, political risk will likely increase and could stymied the reform process in the power, agriculture, and infrastructure sectors.
“We remain more skeptical about real reform in the natural resource sector due to entrenched interests. Generally, we believe the country’s weak rule of law, along with corruption, will act to restrain growth and pose a continuing risk to the banking sector,” S & P stated.
It pointed out that Nigeria’s restrained expansion understates the potential for high growth and large imbalances.
“In our opinion, Nigeria could be exposed over the longer term to inherently high economic imbalances, including periods of credit volatility. This is because its wealth—supported by the country’s immense natural resources—is overly concentrated geographically, industrially, and among its population. In our opinion, this leaves asset prices vulnerable to systemic shocks, such as heightened political risk or a sharp drop in oil prices,” the report concluded.
While the report noted that regulation and supervision under the Sanusi Lamido-led administration at the Central Bank of Nigeria (CBN) have been far more effective than in the previous regime, it, however, expressed apprehension that there could be a lapse when the CBN Governor steps down.
“We view the trend for industry risks in Nigeria’s banking system as negative. In our opinion, mounting competition could push up the appetite for credit risk, particularly among the sector’s lower- and middle-tier banks. This in turn could lead to loosening underwriting standards. The change in the Central Bank of Nigeria’s leadership could in our view alter the positive regulatory developments of recent years, as well as the guarantees and support for lending in preferred (as defined by the Central Bank of Nigeria) sectors. This may further threaten the business models of lower-tier banks,” the report noted.
The report noted the strong recovery at the Nigerian stock market, which prices have recovered strongly since mid-2012, with inflation-adjusted equity prices growing about 33 per cent in 2013, but it cautioned that Nigerian Stock Exchange is prone to volatility, illiquidity in bearish periods, and rapid growth.
The Nigerian banking industry’s risk was based on S & P’s assessment of the institutional framework, competitive dynamics and system-wide funding.
According to the report, Nigeria’s banking regulation and supervision assessment as “intermediate” strongly factors in the proactive intervention of the Central Bank of Nigeria during the 2009 financial crisis, which is thought to have averted a systemic failure. It also takes into account the central bank’s efforts to improve governance and oversight of risk management over the past three years. Nevertheless, staff and data capacity issues remain, as do gaps in the regulatory framework with regards to market, operational, and interest rate risk. Furthermore, the report raised concerns about potential long-term political influence at the central bank.
It described regulatory track record and corporate governance in the Nigerian banking industry as “weak” noting that in 2009, 10 out of 24 banks, which represented between one-third and one-half of system assets, failed and had to be “quasi-nationalized” due to serious corporate governance deficiencies and reckless lending practices.
“We regard governance and transparency in the Nigerian banking sector as “weak.” Positively, domestic banks started reporting according to International Financial Reporting Standards at year-end 2012. Increasingly, half-year and quarterly statements are available. We don’t expect implementation of Basel II or III within the next two years. Despite the efforts of the central bank to increase transparency and governance, for example through the reporting of related-party lending or by limiting tenure of bank managing directors, we still believe aspects of ownership, management, and governance lead to additional risk,” S & P stated.
The report underlined that Nigerian banking industry’s competitive dynamics’ rating represented the structural implications of the competitive landscape that a bank faces within the broader banking industry, which is determined by risk appetite, industry stability, and market distortions.
The report singled out the Asset Management Corporation of Nigeria (AMCON) as the only major distortion in the financial market noting that though it had played a main role in supporting the banking sector by purchasing nonperforming loans and recapitalizing failed banks, AMCON’s continued presence represented a major distortion.
According to the report, AMCON remains a significant shareholder in the banking sector, through its direct ownership of the three quasi-nationalized banks, share collateral from margin loans, and a sizable liability with the Central Bank of Nigeria while all banks also have to pay 0.5 per cent of total assets to AMCON yearly to pay off past bad debt.
