Fitch Ratings has affirmed the Nigerian State of Rivers’ Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ and its National Long-term rating at ‘AA-(nga)’. The Outlooks are Stable.
KEY RATING DRIVERS
The ratings affirmation reflects Fitch’s expectations that Rivers will continue to report a solid operating margin in the medium term, mainly driven by growing non-oil revenue being partially offset by gradually increasing operating expenditure, as well as by improving management disclosure and transparency. The ratings also take into account Fitch’s expectation of rising financial debt, reflecting the administration’s commitment to maintain a high level of capital expenditure to alleviate its weak socio-economic indicators.
Fitch’s base case scenario envisages that the operating margin will stabilise at 60% over the medium term, on our expectation that internal generated revenues (IGRs) will reach 30% of total revenues and exceed NGN100bn by 2016, or about NGN8.5bn per month, up from NGN75bn in 2013. New collection procedures support our projections of rising IGRs and we expect Rivers to see a progressive diminishing of its dependence on oil-generated revenue, which will nonetheless continue to account for 70% of annual revenue or NGN300bn by 2016., up from about NGN220bn in 2012 (75% of total).
Fitch believes that the administration’s commitment to cost restraint will limit the compound annual growth rate to 9% in 2014-2016 (NGN150bn), driven by new hiring (especially teachers) and maintenance costs for infrastructure completed in the past.
In Fitch’s forecast, Rivers will invest about NGN250bn per annum in 2014-2016, mostly in infrastructure and service facilities such as roads, bridges, hospitals and schools, as well as in the oil and gas industry, to sustain gas supply both in the state and in Nigeria. According to Fitch’s projections, 20% of investments will be financed with new borrowing, resulting in total debt of about NGN180bn by 2016, up from NGN105bn in 2013. However, debt is not expected to exceed half of the budget size, with debt service cover ratio remaining strong at below one year of the current balance, when both interest and principal repayment are considered.
Management: In recognition of the importance associated with private and foreign investments, Rivers administration is continuing to improve its transparency and disclosure. Fitch believes that the progressive adoption of more sophisticated accounting standards is credit-positive, as it restricts the scope for discretionary initiatives and human errors, visible in the past. Also, Fitch positively views the efforts made by the state’s administration to contain social unrest in the Niger Delta region.
Fitch believes that efforts to diversify the local economy will make Rivers’s GDP less dependent on oil price and production. Although one of the wealthiest states in Nigeria, Rivers’ socio-economic profile is weak by international standards with the unemployment rate at about 30% in 2013 compared with 24% nationwide. Fitch believes that the unemployment rate would decrease, due to a sizeable investment plan by the state to stimulate the economy over the medium term.