Fitch Ratings has upgraded Nigerian Lagos State’s national long-term rating to ‘AA+ (nga)’ from ‘AA (nga).’ The outlook is stable. The agency has simultaneously affirmed Lagos State’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-’ with stable outlooks and its short-term foreign currency IDR at ‘B’.
Its N275 billion MTN programme, together with its N57.5 billion and N80 billion bonds, which mature in 2017 and 2019, respectively, have been affirmed at ‘BB-’ and upgraded to ‘AA+(nga)’ from ‘AA(nga)’.
“The upgrade reflects Fitch’s expectations of the state’s continued solid operating performance, improved transparency and efforts towards an increasingly sophisticated and transparent administration, which is conducive to growing private sector investments,” said Fitch in a statement.
The rating action reflects Fitch believes that Lagos management is becoming increasingly more sophisticated, with the aim to progressively improve transparency and accountability to international standards.
Fitch notes that the state is improving its governance and disclosure, with budgets and quarterly performance being published on the official website.
Debt management has also improved, with longer bond tenures and more loans from development banks while ministerial departments continue to bolster collections of local taxes.
With a local GDP accounting for 20 percent – 25 percent of the national GDP, Lagos is a key driver of Nigeria’s economy despite being the smallest state by territory.
Domestic production is fuelled by its diversified economy as a commercial hub in the country, with service, construction, transport and industry making up 80 percent of the local economy.
Fitch believes that Lagos’ socio-economic indicators will further improve as local GDP growth is expected to outperform the estimated national GDP growth of 7 percent – 8 percent in 2014.
After recording a strong 57 percent in 2013, Fitch expects Lagos to see its operating margin stabilise at around 50 percent in the medium term, supported by growing local taxes, and by the administration’s commitment to keep cost growth in line with inflation (expected at 8% -10% over the medium term).
“Lagos’ revenue structure is highly diversified compared with the national average, amid continued efforts to expand revenue sources through oil-related projects,” said Fitch.
Fitch expects Lagos’ revenue to remain driven by services and the tertiary sector under its base case scenario.
It expects internal generated revenues (IGRs) to grow above N400bn by 2016, or 80 percent of total revenue, from about N266 billion in 2013 (70%), reducing its dependence on federal allocation.
Fitch expects capital spending to remain at N250 billion in 2014, as Lagos continues to invest in transport (including a light metro transit and a motorway under construction), water, health, education (child-care centres) and social protection.
“We expect spending to eventually decline in 2015-2016, as a new planning period is phased in after the state elections. This should lead to narrower deficits at Lagos before achieving a balanced budget in 2015, from a peak deficit of 25 percent of revenues in 2010,” said Fitch.
