Standard & Poor’s upgraded Nigeria’s credit rating on Wednesday because of improved financial stability and optimism over reforms to the banking and electricity sectors.
Nigeria is among the world’s top 10 crude oil exporters and a key supplier to the United States, China and India. It is Africa’s second-largest economy after South Africa.
GDP growth is projected at around 6.5 per cent this year, down from 7.4 last year due to the impact of insecurity and the economic slowdown in countries importing Nigeria’s oil.
The ratings agency raised its long-term foreign and local currency sovereign credit rating to double-B-minus with a stable outlook, three notches below investment grade, from single-B-plus. This brings its view in line with Fitch’s rating.
Fellow ratings agency Moody’s also expanded its coverage to include Nigeria on Wednesday, assigning a Ba3 rating with a stable outlook. Moody’s said it also expanded its coverage to Kenya and Zambia.
“[Nigeria’s] external reserve buffers have ... been strengthening on the back of high oil prices and strong exports,” Standard & Poor’s said in a statement.
“The government has sustained reform momentum in several key areas, including cutting the fuel subsidy and reforming the power sector, and the authorities have restructured and strengthened the previously troubled banking sector.”
Nigeria’s foreign exchange reserves have risen to around $42-billion (U.S.), up from around $33-billion at the start of the year.
The Excess Crude Account (ECA), where it saves money it earns from oil exports over a benchmark prices, contains around $8.4-billion, compared with $2-billion at the end of 2010.
This is still down from $20-billion in 2007 and economists say savings can be too easily raided by government.
Nigeria set up a Sovereign Wealth Fund earlier this year to better protect its savings but it has been restricted to $1-billion due to opposition by state governors.
Africa’s most populous nation is still hobbled by widespread government corruption and mismanagement.
“The stable outlook assumes that the government will continue to pursue its reforms ... and that there will be no worsening of political tensions and no significant return of insurgency in the Niger Delta,” S&P said.
A 2009 amnesty for militants in the Niger Delta reduced violence and sabotage to oil facilities, which at their height in 2008 cut out a third of the country’s oil output.
But large-scale oil theft by organized criminal gangs is still a risk to the economy. Foreign oil majors believe around 150,000 barrels per day (bpd), out of Nigeria’s total production of around 2.3 million bpd, is being stolen.
Radical Islamist sect Boko Haram has killed more than a thousand people since an uprising in 2009 but its bomb and gun attacks have been limited to the north and the capital Abuja and have not affected the oil region or the commercial hub Lagos.
Nigeria removed fuel import subsidies in January, which cost an estimated $7-billion last year. Although President Goodluck Jonathan was forced to partially reinstate them after nationwide protests, it has lifted a burden from the treasury.
Nigeria is expected to complete the privatization of the bulk of its electricity sector next year, which should help reduce chronic power shortages that are the biggest brake on economic growth and the chief complaint of businesses.
“I think it’s [the upgrade] justified and actually long overdue,” said Stuart Culverhouse, head of research at Exotix.
“I don’t have big concerns about debt or fiscal sustainability so the higher rating, which brings it into line with Fitch, is deserved.”
JP Morgan last month added Nigeria to its local currency government bond index, pushing up bond prices by 300 basis points and supporting the local naira currency.
JP Morgan said the index inclusion could bring additional inflows of at least $1.5-billion to the bond market.