Fitch rates Lagos on par with sovereign as IGR to hit N400 bn

Fitch Ratings has reaffirmed the BB- long term ratings of Lagos, putting it on par with the sovereign rating of Nigeria.

Lagos is the leading state in the federation in terms of internally generated revenue (IGR). It achieved N200 billion in 2010 and is projected by Fitch to reach N400 billion in 2015, equivalent to 80 percent of total revenue.

“We are not clear if the projection for Lagos makes allowances for the FGN ruling that state governments cannot employ fiscal agents to collect revenue on their behalf,” said Gregory Kronsten, analyst at FBN Capital in a recent note.

Fitch Ratings issued four reports on 21 March on Nigerian sub-nationals.

It reaffirmed the BB- long term ratings of Rivers, and the B+ rating of Kaduna, while withdrawing the rating of Akwa Ibom, citing the state government’s non-participation in the process and its (Fitch’s) resulting paucity of information.

Rivers State managed IGR of N60bn in 2010 and is projected by the agency to achieve N100bn in 2015, equivalent to 25 percent of total revenue.

Rivers has access to oil revenue through the 13 percent derivation formula, and is the oil hub for Nigeria.

Fitch sees this revenue as yielding as much as N250bn per year over the medium term.

Turning to operating margins, Fitch sees Kaduna’s at 40 percent this year, and that of Lagos and Rivers stabilizing at 50 percent and 65 percent respectively in the medium term.

Rivers is expected to spend about N200bn annually on infrastructure (and finance about 10 percent of it with debt), and Lagos about N250bn in the medium term. Fitch raises the possibility that Lagos could manage a balanced budget as soon as 2015.

“What distinguishes these states are their programmes of capital expenditure on the infrastructure with view to attracting private investment,” said Kronsten.

The greatest risks of a downgrade in the view of the agency lie in a decline in the operating margin towards 30 percent for Lagos, or a fall below 50 percent as a result of rising unrest in the Niger Delta in the case of Rivers and in accelerating debt accumulation in the case of Kaduna.

The ratings apply to the N275bn medium term note (MTN) programme of Lagos State, as well as its bonds maturing in 2017 (N57.5bn) and 2019 (N80bn). Kaduna’s debt issue matures in August 2015.

“The majority of the 36 states are not rated and many would not secure a rating to their liking if they initiated the process,” said Kronsten.

PATRICK ATUANYA