Fitch: Sanusi Suspension Will not Alter Nigeria’s Credit Fundamentals * Political, External Shocks May Test Sanusi Legacy

The suspension of Central Bank of Nigeria (CBN) Governor Lamido Sanusi and the market reaction to it are the first major test of the more credible macro policy regime Sanusi helped establish, Fitch Ratings says. Sanusi’s unexpected suspension does not significantly alter Nigeria’s credit fundamentals. But it triggered a sharp naira sell-off and a rise in naira bond yields. If sustained, this will increase inflationary pressure, making it more likely that the monetary policy committee on 24-25 March will introduce further tightening, including a possible rise in interest rates. Senior CBN voices, including Acting Governor Sarah Alade, have reiterated the CBN’s core objectives of preserving exchange rate, price and financial stability. Governor Sanusi’s suspension followed his strident attacks on oil revenue leakage as it passed through state oil company NNPC on its way to the budget Federation Account. Further evidence of poor transparency and weak control in the oil sector prompted the inance minister to call for a forensic audit of oil accounts at a Senate hearing this month. It is credit positive that these issues are increasingly in the public domain, and that the political will to address them in some quarters has increased. The failure of Nigeria’s international reserves, including the buffer Excess Crude Account (ECA), to rise while oil prices are high has been a long-standing weakness in the sovereign credit profile. International reserves have been falling since last April and were $41.2 billion in the month to mid-February, equivalent to 5.6 months of gross current account payments at end-2013, but are not overly large for a country as dependent on oil revenue as Nigeria. A larger cushion would be positive for the credit profile. Progress on broader structural reforms remains mixed. The Petroleum Industry Bill, uncertainty regarding which has caused new investment to slump, remains stalled. One of its provisions would be to break up NNPC and bring greater transparency to the oil sector, which would be credit positive. The decision to put an additional $550 million into Nigeria’s sovereign wealth fund for investment in electricity is positive, although the fund is too small to act as a buffer against shocks. Meanwhile, electricity reforms continue, although a significant rise in production remains some way off. Agricultural reforms are also progressing. The budget is still in the National Assembly but is being actively reviewed, despite concerns that passage would be hostage to pre-election politics (elections are due in February 2015). It retains a conservative oil price assumption and more realistic capital spending projections. Production assumptions remain ambitious, however, to judge from recent outturns. The ECA balance was less than USD2.5bn, according to the CBN’s most recent MPC minutes. This reduces the risk of an overly stimulative fiscal stance that would increase the debt burden, which remains low, at around 20% of GDP. However, the low ECA and dwindling international reserves also mean the cushion against shocks is being depleted. Intervention to support the naira will have led to further depletion last week and the trend is likely to continue, with the current account surplus gradually eroding and political risks likely to weaken the capital account. We affirmed Nigeria’s rating at ‘BB-‘ with a Stable Outlook in October 2013. The next review is scheduled for 11 April.
Source: Reuters

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