advertisement

[email protected] New York, NY, USA

ANNOUNCE THIS ARTICLE TO YOUR FRIENDS

SOVEREIGN CREDIT RATING
…NOW THAT NIGERIA HAS EARNED IT – WHAT’S NEXT?

…Pleasant Surprise!

he news that Nigeria has been rated (BB-) by Fitch rating agency, two weeks ago was quite a surprise to most international analysts according to Reuters. But as expected, policy makers and business executives in Nigeria met it with glee. Standard & Poors also assigned a similar rating this Monday. In the world of finance, any news they say is good news; depending on what side of the aisle you belong.

There’s indeed a lot of symbolism in the fact that Nigeria has finally acquired a sovereign credit rating for the first time in history. That it was rated even better than neighboring Ghana and Senegal (considered relatively stable) or at par with Brazil, Turkey, Ukraine (with stronger economies and better infrastructure) makes it more exciting.

This development is an added impetus to the few home-runs scored by the administration, at least in the eyes of international observers. The major feat that broke the camel's back in my view was the debt deal clinched with Paris Club of creditors last summer. To buttress this; President Obasanjo was showered with encomium and received a standing ovation during his speech to a packed auditorium at the last World Economic Forum in Davos. Not even the hostage crises in Niger Delta could dampen enthusiasm about Nigeria.

Realistically, this singular event changes the ball game for Nigeria. It bestows a seal of approval by important international institutions like the IMF/World, European Union as well as private creditors. In other to achieve any far-reaching economic progress, Nigeria needs these counter-parties on its side.

Being rated at all unveils a whole new scenario both on the domestic and international front. It has become a fact of life in advanced societies, that credit rating either for an individual or corporate entity is a generic yardstick for evaluating the credit worthiness or otherwise of a potential borrower. As we all know here in the US, without a good credit score, most lenders won't touch you with a six-foot pole.

advertisement

In the post-war era, thanks to the emergence of a coordinated global financial framework, it became possible to assess the financial viability of countries and ascribe a rating, which ranges from triple A to D. Some of analytical indices used to reach such conclusions are; level of indebtedness, perceived ability to meet financial obligations, measure of transparency and discipline in fiscal regime, and national economic policy agenda. To view a nation favorably, investors and lenders must be able to understand and “rap their hands around” a country’s financial status.

…Fringe Players
African countries, including Nigeria have for long remained on the fringes of the global economy and therefore unable to mobilize required investment dollars because amongst other factors, they were not rated – Africa’s share of global capital flow was less than 2% in 2004, according to United Nations. In recent years, through international donor support, coupled with encouraging economic signs at home, some countries like Ghana, Botswana, and Senegal have become rated.

Three major organizations have carved a niche in this area of service, namely Moody’s, Standard & Poors, and Fitch. To become relevant in global finance, a country needs not only be rated, but must strive to maintain a favorable rating in perpetuity, which could enable it issue long-term debt instruments to raise money (sell bonds) from the international capital market at competitive rates than commercial loans. One of the best-rated sovereign entity is the United States and not withstanding the bloating budget deficit, Treasury bond is still considered one of the safest investments on earth, because it is backed by the full faith and credit of the most powerful government.

…Into The Mainstream
This achievement could elevate Nigeria’s investment profile and position it within the radar of fund managers and institutional investors. Already, report indicated that Nigeria had one of the highest returns on investment in 2005. Over the years its capital market has been adjudged as one of the better performers amongst exchanges around the world, yet Nigeria hasn't been able to compete favorably with other emerging markets in attracting serious non-oil investment from mainstream investors abroad.

If the experience of the last 5 years is anything to go by, in pursuit of superior performance that have eluded most advanced markets, institutional funds managers have been scavenging around the emerging markets for superior returns – notably in China, Russia, India, Brazil, South Korea and Hong Kong. Not to be outwitted, reports show a growing appetite for emerging market mutual funds by portfolio managers and retail investors; some of these funds have posted consistent double-digit gains since late 1990s. Quite often, you read advice columns in industry publications encouraging investors to consider international funds as an integral aspect of their strategy.

This bodes quite well for Nigeria, because if leadership stays on course, the country might well become a vibrant destination for investments. Despite the highly celebrated fat returns and seeming robust performance of Nigerian Stock Exchange (NSE), size of portfolio investment was less than $60 million in 2004 based on data from the exchange. The bulk of foreign direct investment, albeit admirable by African standard at $1,8 billion, ends up in the extractive industry (oil and gas) with dismal long-term impact on the environment, poverty alleviation, employment creation, and overall productivity in the domestic economy. You could argue that, the telecommunication sector has made more impact in just 5 years.

The new rating will offer a well-timed boost to financial institutions as well as public companies, because funds from international capital market could increasingly become accessible to those who know how to tap it.

… Points to Ponder
One thing going for Nigeria is that it would virtually write down its external debt from $32 billion to $5 billion and still have in excess of $25 billion in foreign reserves. With crude oil prices still in the $60 range, reserve will continue growing, so politicians will have to really work overtime to derail this train. But before you start celebrating, consider a few pressing questions:

1. What impact after all, would a credit rating have on the standard of living for majority of the populace? – An average Nigerian knows noting about credit rating, so unless the benefits trickle down fast, he/she could care less.

2. How could both the private and public sectors to mobilize financial resources and investible assets into the economy, leverage the credit rating?

3. What safety measures will be put in place to avoid the re-occurrence of the debt-trap? – More/easier money from the international market is not necessarily free, these are still obligations that must be serviced.

4. How would Nigeria ensure that it maintains a positive credit rating and hopefully improve upon it to attain better grade over time? – Credit rating is not a permanent badge of honor. Germany and Japan have recently suffered setbacks in their credit quality due to dwindling rating.

5. How knowledgeable and better positioned are Nigerian technocrats and business leaders to deploy financial resources raised abroad into crucial sectors that would generate multiplier effect on the economy? – Borrowing money to build white elephant projects will simply re-kindle the sad history of mismanagement and ineptitude.

6. How sustained will the reform process be after 2007? – The facts remain that; this modest success achieved within such a short period comes against the backdrop of recent reform effort and thanks to the credibility of the economic team. What’s the guarantee that the gains won't be squandered on the alter of power shift and partisan politics.

…World of Uncertainty
There has been quite a lot of buzz recently around Nigeria’s business community about competing in the global market. This is probably the first serious signpost that the globalization train is fast approaching Nigeria. A more internationalized financial system would put Nigeria in the same stead as other emerging countries. There will be a preponderance of new and exotic financial products - options, derivatives, hedging techniques, swaps, arbitrage etc will soon become part of boardroom lexicon in Nigeria.

Such an environment portends both opportunities and uncertainties. Other emerging markets like Argentina, Malaysia, Russia, Brazil, South Korea at various times had experiences that sent shock waves through their economies, due to the overbearing influence of international capital. Summarily, the long-term prospects will outweigh any temporary mishaps if only policy makers would sharpen their regulatory skills and remain alert.

Chamberlain is the Founder & President of New Era Capital Corp. and MyCompleteFinance.com, a New York based financial services group. He was previously a Financial Advisor in the Global Private Client Group, of Merrill Lynch.