Monday, November 15, 2010

Nigeria: The Downgrading of Credit Outlook

Fitch Ratings recently lowered its sovereign credit outlook on Nigeria to negative from stable, citing the depletion of its windfall oil savings and heightened political uncertainty ahead of elections next year.

Nigeria's rating of BB-minus is three notches below investment grade According to the global rating agency, the continued withdrawals from the excess crude account (ECA), into which Africa's biggest oil producer saves crude oil earnings above a benchmark price, and lower forex reserves were a threat to economic stability. Sunday Vanguard Business spoke to experts on the ratings, which have continued to provoke reactions in financial circles across the country.

Government should invest wisely in critical infrastructure and do away with subsidies--Alhaji Bukar Kyari, Managing Director, Value Card Nigeria Ltd.

This implies the government is spending excessively and there is no tangible outcomes of these spendings. The excess crude account has depleted from a high of $20 billion to less than $500 million. The question is why did that happen? One may argue that there is no constitutional backing for such an account.

Though the intention for setting such an account was laudable, the process should have had legal backing. And, the manner in which the proceeds should be utilised clearly spelt out such as investment in "critical national infrastructure". This could be defined as - power, healthcare, education, etc.

The second factor attributed by Fitch is also a cause for concern, meaning the two factors are indicative of spendings by the governments at all levels. If these are not investments but rather wastefully spent, then there is justification for the downgrade. But if a good portion of the money went to investments in the critical infrastructure of the nation, then the basis of the downgrade or concerns are baseless.

However, it is a known fact that in most democracies, election year brings about huge spendings by the party in power in order to appeal to the electorate. Thus, the Nigerian government may not be an exception. The additional $600billion injection into the US economy by Ben Barnanke did not help the democrats retain the majority control in the House of Representatives. It may just be a case of too little too late.

The heavy spendings in the last few years have not shown a noticeable improvements in the critical national infrastructure such as power. One area that requires mentioning is the Sovereign Wealth Fund, which I understand is undergoing legal enactment process at the moment. That may be the answer to the excess crude account.

It will reduce investors' interest and investment inflow to the economy -Prince Yemisi Shyllon, an investment consultant and chartered stock broker.

The Fitch ratings are based on global parameters of measuring the economic performance of institutions and nations which has long been established and acknowledged by all sane countries of the world. The facts relied upon by the rating agency were provided by Nigeria. My reaction to the rating is that it will reduce investors' interest and investment inflow to the Nigerian economy and would decrease Nigeria's ability to take advantage of opportunities that often arise in global financial markets. This will translate eventually to a further decline in the business environment, economic performance, medium and long term investments in Nigeria and the standard of living of Nigerians.

The way forward is for Nigeria to invest in infrastructural development, increase local employment, generate sound policies, laws, procedures and strengthen enforcement agencies for Nigeria's political stability, especially in anticipation of next year's elections, provide better investment in education and health and put in place drastic reduction in the cost of running government in Nigeria.

We should look at our balance of trade-John Egesi, former DG, NIMASA

As a marine expert, what concerns me is the in and out flow of goods from our ports. Nigeria essentially remains an import-dependent country and most of the containers that come to Nigeria go back almost empty and what that means is that the incidence of cost of carriage falls on the average Nigerian . So, the more we import, the more we pay for the cost of production and the total cost of round voyage. So, we should look at our balance of trade which is containerised goods, and other bulk trade that is not oil.

What I suspect is that we are filling the gap created by the fall in the price of crude oil as the economy still has to survive between that time and the time global oil price picked up. What we are looking at is a historic thing not a real time situation. No matter what we do, PHCN has to work for the economy to rise. If it is true that our lawmakers are over-paying themselves, that is scandalous and immoral. We are a low economy and should play the Indian game- stooping low to conquer.
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We should be cheap to win. This is the time to attract industries but the people in power must show good examples. If the cost of running government from the top to the bottom is too high, the President should quickly do something. The Fitch rating is something we should deliberate seriously about. All those areas where we could press the sponge to let the excess water dry out should be done .

Our leaders should learn to separate economics from politics - Daniel Moore, CEO, Thelia Limited

There are two things one needs to look out for here. One is internationally, Nigeria is not just about economy but also politics. I suspect what is playing out is the battle of supremacy between the American and British governments over who controls the country's economy after the elections.

There are strong signs that Britain is already aware that they would no longer control Nigeria as they have done in the past by ensuring that power remains in the north.

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