Tuesday, December 14, 2010

Fitch affirms Nigeria's Rivers State at B+/AA-(nga)


Fitch Ratings has affirmed the Nigerian State of Rivers (Rivers) Long-term foreign and local currency ratings at 'B+' and National Long-term rating at 'AA-(nga)'. The Outlooks are Stable.

The rating affirmation reflects prospects of stable operating performance coupled with the administration's commitment to limit cost growth in a context of increasing debt and abating restiveness in the Niger Delta region.

Easing macroeconomic uncertainties, which led to the revision of the Outlook on the Nigerian Federal Government to Negative in October, together with improving operations may trigger an upgrade if the debt burden remains low and the operating margin strong. Conversely, the ratings might be downgraded if the re-escalation of restiveness in the region hits state revenues, or looser cost control leads to a fall in the operating margin.

Rivers State's budgetary performance remains largely in line with Fitch's expectations despite a larger-than-expected (33%; forecast: 25%) fall in oil revenue to about NGN190bn in 2010. Withdrawals from the Excess Crude Account (ECA) helped supplement federal allocations (FA), leading to non-recurrent proceeds of about NGN70bn in 2009 and NGN27bn in 2010. With the ECA reserves depleted, the state's share of FA in 2011-2012 could be more volatile as the account's ability to act as a shock absorber for fluctuations in oil and prices has been reduced.

The large attacks on oil wells disrupting production in 2009 have diminished following the amnesty programme. However, training and integration of former insurgents may prove lengthy and more costly than anticipated. A resumption of insurgency could inflate overheads and other costs, which in 2009 and 2010 were about NGN33bn per year. Risks remain that recurrent spending could edge closer to NGN100bn in 2011-2012, from about NGN83bn in 2010.

Rivers' commitment to curtail cost growth should help maintain the operating surplus above NGN150bn, 65% of the operating revenue, over the medium term. After pay rises awarded in 2008-2009 to re-motivate and re-professionalise staff, doubling personnel spending to NGN48bn, the wage bill is unlikely to increase significantly above NGN50bn in 2011, despite hiring in the education and health sectors to improve service provision to residents.

Fitch takes comfort from the state's commitment to largely calibrate investment to budgetary surpluses. Although the upgrade of roads, health centres and schools continues, capital spending fell to NGN177bn in 2009 from the peak of NGN225bn in 2008. However, debt-funded investment programmes may push back capital spending close to NGN200bn over the medium term.

A 12-month bridge loan of NGN30bn will translate into debt outstanding of NGN26bn at end-2010. Bond issues have been postponed to 2011 and debt remains below Fitch's projections of NGN200bn by 2012. As borrowing grows, Fitch views positively the state's commitment to develop tax revenue. Although the introduction of a 3% service levy in 2011 on both self-employed and employees may not significantly boost Internally Generated Revenue (IGR), it does help spread the participation of residents into the tax system. At the same time, the completion of the taxpayers' registration is likely to push IGR above the NGN50bn being collected in 2010 and likely double it by 2012, almost covering recurrent costs, including interest expenses. Liquidity remains strong.

Rivers is located in the south of Nigeria with a population of 5 million inhabitants (accounting for about 4% of the national total) mainly employed in subsistence farming. However, the state is one of the richest in the country due to the concentration of oil production. Per capita GDP is about NGN600,000 (EUR3,000; USD4,000).

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