LOCAL VIEWS ON NIGERIA'S FITCH AND S&P RATINGS

UNCLAS SECTION 01 OF 02 ABUJA 000900 SIPDIS SENSITIVE SIPDIS TREASURY FOR KOHLER/SEVERENS USDOC FOR 3317/ITA/OA/KBURRESS USDOC FOR 3130/USFCS/OIO/ANESA/DHARRIS E.O. 12958: N/A TAGS: EFIN ECON NI SUBJECT: LOCAL VIEWS ON NIGERIA'S FITCH AND S&P RATINGS REF: A) ABUJA 657 B) ABUJA 321 ¶1. (U) Summary: Some Lagos business leaders, looking at the credit ratings as a broad indicator of Nigeria's economic prospects, consider the January 31, 2006 Fitch Ratings of BB minus and the February 6, 2006 Standard and Poor's (S&P) Ratings of BB minus for long-term foreign currency and BB rating for local currency are too optimistic. They criticize the reports for not mentioning concerns regarding double-digit inflation and wage pressures likely to arise as the 2007 election draws near. Some view the reports as politically motivated and not an accurate indicator of the business climate in the nation's commercial hub, Lagos. End summary. Reserves Forecast Too Optimistic? -------------- ¶2. (SBU) A number of Lagos based analysts have weighed in with their opinion of Nigeria's recent credit ratings. Some of them tended to view the ratings as an overall statement on Nigeria's economic prospects, while others addressed the more relevant (to the ratings) question of Nigeria's likelihood of repaying its debt. Several Nigerian economists said the Fitch Report's 2006 year-end international reserves forecast of USD 42 billion is too optimistic. They place the figure between USD 30-35 billion. Financial Derivatives Company CEO, Bismarck Rewane, criticized the report for not fully addressing the Central Bank of Nigeria's (CBN) failure to control inflation and regulate monetary policy, and perhaps more importantly, its inability to spur growth in the small and medium-sized enterprises (SME). Economic Associates CEO, Ayodele Teriba, believes the ratings failed to take into account the CBN's lack of true autonomy in controlling monetary policy, as well as its often contradictory policies regarding controlling inflation and spurring growth in the SME sector. United Bank of Africa Executive Director Chika Mordi argued the CBN was not performing its primary duty, controlling inflation and directing monetary policy. Teriba opined that positive economic growth in Nigeria was more a result of an upswing in the global economy and higher oil prices, not necessarily because of Government of Nigeria (GON) reforms or policies. Moreover, the recent disruptions to oil production in the Niger Delta, and concerns that oil production might be halted further, were not addressed at the time of the credit ratings (refA). High Domestic Debt -------------- ¶3. (SBU) Rewane criticized the Fitch Report for not addressing the impact of the 2007 elections in determining economic outcomes. He said the GON would face pressure to raise minimum wages as workers continued to face double-digit inflation and reduction in living standards. Moreover, bureaucratic inefficiencies were likely to cause delays in meeting debt payments and obligations. The possibility of slippage, or delay in payment remained high. Lagos Business School Director Pat Utomi said the real challenge was paying off domestic debt, which he believed the GON was unlikely to do. ¶4. In contrast, our U.S. Department of Treasury Representative emphasized that with the settlement of the Paris Club debt, Nigeria's overall debt stands at 4.5% of GDP, far more reasonable than the 60% figure in 2003. The Federal Government (FG) was in the process of restructuring the domestic debt with longer maturities, aiming to develop the capital markets of Nigeria for the future. Banking Community Skeptical -------------- ¶5. (SBU) Bank experts believe attributing positive economic forecasts based on the GON's on-going reform program was misleading, because the reforms had not brought fundamental improvements in the economy or raised living standards for the majority of Nigerians. Firms faced much higher costs of production than in the rest of the region due to poor infrastructure and bureaucratic obstacles. Nigerians faced limited access to credit, inefficient land titling and conveyance procedures, multiple taxes and tariffs, and poor health care and education. First Bank Nigeria Capital Limited Executive Vice-President, Kofo Majekodunmi, said Nigeria had the lowest level of GDP per capita of any country ABUJA 00000900 002 OF 002 rated BB minus, while unemployment was high, and living standards are poor. Several years of sustained effort were necessary to tackle economic and social challenges, he said. Majekodunmi conceded, however, the positive ratings had promoted foreign investment, and had led to some increase in portfolio investment into the economy. ¶5. (SBU) Utomi said the reports were 'politically' motivated. The teams sent by Fitch and S&P to do their ratings spent their time in Abuja speaking with Finance Minister Ngozo Okonjo-Iweala and other high-level government officials, without examining the realities on the ground. Other experts concurred that greater exposure to the business and microeconomic environment outside Abuja might have led both organizations to give Nigeria a lower rating. ¶6. (SBU) Comment: The fact Nigeria was rated has been a positive advertisement for Nigeria's reform program, and has led to increased investor confidence. The Finance Minister and GON are touting the Fitch and Standard and Poor ratings as indicators their reform programs are working. With most reforms focused at the macroeconomic level, however, and with only two years of implementation, the impact while very positive is limited in its scope. Many Nigerians believe their overall living standards have declined under the Obasanjo administration. In a land where conspiracy theories abound, some see the timing of the reports engineered to promote political agendas and boost support for President Obasanjo in the run-up to the 2007 election. The GON hopes these ratings will boost investor confidence in Nigeria's economy while increasing access to long-term external credit for local businesses. Whether the GON can build on improved investor confidence is another question. Some members of the Lagos financial community are not so optimistic. ¶7. (U) This cable was drafted by CG Lagos. FUREY