Just a week after Fitch Ratings issued Nigeria’s first sovereign credit rating, Standard & Poor's followed suit this past Monday announcing its own rating for Africa’s most populous country. Both agencies assigned Nigeria a long-term foreign currency rating of ‘BB-‘. While this is well below investment grade, the existence of a rating alone is still an important development, as credit ratings can provide a benchmark to evaluate risk relative to other emerging markets, deepen domestic capital markets and promote public sector transparency. Nigeria’s ratings are on par with such countries as Turkey, Ukraine and Brazil.
The decisions by Fitch and S&P were significantly influenced by Nigeria’s debt buyback agreement with the Paris Club last October that, with a successful IMF macroeconomic evaluation this spring, will allow Nigeria to clear the books of their Paris Club debt. (See CGD’s initiative on Nigerian Debt Relief for more information on the deal.)
According to the Financial Times (registration required):
“One of the most crucial factors in the ratings decision was the government's agreement last year with the Paris Club of creditor nations that culminated in Nigeria "extinguishing" all of Dollars 31bn of debt originally owed to the group by April this year, said Veronica Kalema, director at Fitch's sovereign ratings group.”
But the government still faces stiff challenges, including the recent upswing of violence in the Niger Delta and the political uncertainty surrounding the upcoming 2007 national elections. On the same day Fitch announced its credit rating, militants released four foreign oil workers held hostage for 19 days. A series of recent attacks have reduced Nigeria’s oil output by 10%.
Political tensions will also probably increase as the election date nears. Even a constitutionally forbidden third term for President Obasanjo, which might keep the current reform agenda in place, could threaten the country’s relationship and goodwill with international creditors and investors. There is also probably only a small window of opportunity to push for difficult reforms before the election takes over the political scene. Even still, the ratings are a positive step, giving a boost to the government’s reform agenda and signaling Nigeria's continuing re-engagement with the global financial community.