Nigeria’s downgraded alleged sovereign risk rating

nigeria-cbn( On Friday last week, Fitch – an international credit ratings agency – reportedly kept the nation’s sovereign credit rating at BB-minus, while downgrading its credit outlook from stable to negative. Finance Minister Olusegun Aganga roundly condemned the agency’s decision (on Nigeria’s credit outlook) as “unduly punitive,” even as he also crooned that Fitch’s decision to retain the risk rating “underscores that the ongoing reforms being implemented by the Federal government are on the right track and (that) prospects for economic growth remain bright.”

No, Mr. Finance Minister, you simply cannot speak from both sides of the mouth! The action by Fitch is either an indictment of the way fiscal and monetary policies have been implemented so far, or an endorsement – not both. There is a preponderance of evidence to show without equivocation that the former is clearly the case in this instance.

That the rating agency maintained the same rating of BB-minus – even without additional comments – should not be a reason for self-indulgence. This is why we wonder why the Finance Minister chose to misrepresent facts and downplay the gravity of the downgrade, by reportedly telling an audience at the annual conference of the Nigerian Economic Society in Abuja, “If you read the Fitch report, it appears that, globally, we have one of the lowest.”

As a former Managing Director of the world renowned investment powerhouse, Goldman Sachs, Mr. Aganga certainly knows that a Fitch rating of BB-minus cannot by any stretch of the imagination be described as “one of the lowest in the world.” As a matter of fact, a BB-minus rating is three notches below ‘investment grade’. With this type of rating, any hope of attracting genuine investors – as distinct from economic leeches – will remain a pipe dream, not to mention the higher costs the nation will have to incur on external borrowings!

In deciding to revise the rating downwards, the agency’s sovereign ratings analyst, Ms. Veronica Kalema, cited – among other factors – the near total erosion of the Excess Crude Account by the Federal Government, unsustainable depletion of the foreign exchange reserves, and short-term political uncertainty in the build-up to the 2011 elections. Ms. Kalema is not saying anything the media in particular and Nigerians in general have not been saying through editorials, commentaries and public debates. Rather than choose to live in self-denial and pick on the rating agency, the government ought to re-focus its energy on turning the unsavoury situation around.

Mr. Aganga has laboured to convince a skeptical audience that the recent measures adopted by the government – principally aimed at revitalizing the financial sector – are developments which indicate that the country is on the right track. Is this really true? If he answers in the affirmative, then how come nothing significant has changed in the economy or appears likely to change in the near future? And for him to go as far as maintaining that the nation is set to record “another year of exceptional growth in 2010, with our economy expected to expand by 7.75%” is simply to engage in unwarranted sophistry. How real is this frequently touted growth? Is it not largely driven by rising crude oil prices in an unpredictable world oil market – a case, essentially, of growth without development?

How many new jobs has the 7.75% ‘growth’ created? Is the manufacturing sector now set to contribute more than the paltry four percent to the GDP, which has sadly been its lot? Are we not still living witness to unbridled violence and assassinations attendant on such mundane activities as party membership registration, ward congresses, by-elections, party primaries and local government council elections, even as the Federal Government continues its avowal, ad nauseam, to deliver a free and fair, credible poll in a few months’ time? Has the lingering disquiet in the ruling party over its zoning formula, or the proliferation of light firearms or the tardy preparations for the 2011 elections not contributed significantly to mounting political tension and a climate of uncertainty?

It needs emphasizing, incidentally, that the mere depletion of Nigeria’s windfall savings and foreign exchange reserves does not by itself constitute heightened risk. The question ought to be, and primarily is, a matter of how the funds were utilized. The economy gains when investments are geared towards increasing productivity, generating higher revenues and/or executing cost-reduction programmes. But it suffers when funds are squandered (e.g. through white elephant projects), frittered away on recurrent (consumption) expenditures, or diverted into the private pockets of public officials and their cronies. The naked truth is that Nigerians are yet to see any tangible results of previous massive ‘investments’ in sectors like power and infrastructure, making them highly skeptical and distrustful of the government’s promises to “make more investments aimed at improving the economy.”

We advise the nation’s Economic Management Team to see the Fitch report for what it is – a timely wake-up call. Those at the helm of affairs should consider taking the following remedial actions: re-ordering government priorities to place more emphasis on increasing production rather than consumption; introducing fiscal discipline in order to curb the widening budget deficit and burgeoning public debt (with their attendant adverse impact on monetary indices); seriously tackling the hydra-headed monster of corruption in a more transparent manner; introducing well-targeted financial stimulus measures aimed at empowering the real sector to absorb the army of jobless youths and graduates by creating new jobs; and diversifying the economy away from the present hazardous dependence on a mono-product.

The Fitch bitter medicine is one that the present administration must drink to the dregs – for the health of the nation.

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