Nigeria S&P Upgrade Hindered by Fund Tensions With States

Nigeria’s chance of a rating upgrade is being hindered by a lack of clarity over how its sovereign wealth fund will grow amid tensions with regional governments over revenue allocation, Standard & Poor’s said.

Increasing the size of the fund from its initial $1 billion is key to building up external buffers that are needed for an upgrade in the B+ rating of Africa’s biggest oil producer, Christian Esters, a sovereign analyst at S&P, said in a phone interview yesterday from Frankfurt.

President Goodluck Jonathan signed the sovereign wealth fund into law in May last year. Nigeria’s 36 states say they plan to file a lawsuit challenging transfers by the federal government, including those to the wealth fund. The constitution requires government revenue to be shared among local, state and federal authorities.

“I don’t think currently we have visibility about how quickly this new sovereign wealth fund will grow,” Esters said. “It continues to be a challenge for the federal government to convince the states to get them on board and to convince them what the advantages would be.”

The suit by the state governors won’t affect the $1 billion already set aside for the wealth fund, Finance Minister Ngozi Okonjo-Iweala said Sept. 21.

Okonjo-Iweala named a management team for the Nigerian Sovereign Wealth Investment Authority on Aug. 28, headed by Uche Orji, a former Goldman Sachs Group Inc., UBS AG and JPMorgan Chase & Co. banker.

‘More Independent’

Nigeria currently saves oil revenue above a benchmark budgeted price in an excess crude account. The governors agreed in June to boost savings in the account to $10 billion. Its balance last month was 1.32 trillion naira ($8.4 billion), Minister of State for Finance Yerima Ngama said Oct. 12.

“They’re trying to set up something that is more independent from the day-to-day vagaries of politics and more independent from the regional states wanting to tap the fund, which is the case for the excess crude account,” said Esters.

The sovereign wealth fund law requires it to allocate money to infrastructure, the future generation and budget stabilization, with each representing at least 20 percent of the total. Savings through the fund will provide a buffer against volatility in oil prices, according to Okonjo-Iweala.

S&P raised its outlook on Nigeria’s credit rating, four steps below investment grade, to positive from stable on Dec. 29, indicating a possible upgrade if the government follows through with plans to boost the economy and savings. The ratings company typically considers an upgrade between 12 and 24 months after an outlook is raised or lowered, said Esters.

Oil Dependence

The nation’s foreign-exchange reserves have increased 28 percent this year to $42 billion. Nigerian benchmark Bonny Light crude has risen 26 percent from a June low to $113.67 a barrel.

“One of the triggers for an upgrade is fiscal and external buffers in the form of reserves against the dependence on oil revenue,” said Esters. “Reserves have increased, but we still need to see some track record in the light of high oil prices and why haven’t they been increasing even more?”

The West African country relies on crude exports for about 95 percent of its foreign-currency earnings and about 80 percent of government revenue.

Borrowing Costs

Borrowing costs on Nigeria’s $500 million of international dollar bonds due 2021 have declined 152 basis points this year to 4.63 percent at 4:30 p.m. in London, a record low since their January 2011 issue, according to data compiled by Bloomberg.

Nigeria’s inflation rate, vulnerability to external shocks and governance challenges are weighing on the country’s chance at a rating upgrade, as government policies have yet to boost growth, Richard Fox, the London-based head of Middle East and Africa Sovereigns at Fitch Ratings, said in a statement today. Fitch affirmed its BB- rating on Nigeria, three levels below investment grade.

In December, S&P said that the one-in-three chance of an upgrade would depend on no worsening of political tensions between the mainly Muslim north and Christian south.

Violence and bombings instigated by members of the Boko Haram Islamist militant group seem to have declined recently, while wealth distribution between the regions is still an issue, Esters said.

Africa’s most populous nation of over 160 million is battling an insurgency by the group that has killed hundreds of people in the north and Abuja, the capital, since 2009. Boko Haram, whose names means “Western education is a sin,” says it’s fighting to create an Islamic state in Nigeria.

“That tension is expressed through a movement like Boko Haram, which appears on the surface to look like a religious movement, but one of the underlying issues is really the distribution of wealth in the country,” Esters said. “That’s more a medium-term challenge that the government needs to address and the sovereign wealth fund is one key in that puzzle.”

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