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Financial Times: Surprise at first rating for Nigeria

By Joanna Chung in London
Published: January 31 2006
Fitch Ratings surprised some bond market participants yesterday by assigning Nigeria its first credit rating – at only three notches below investment grade.
The long-term debt rating of BB- puts the government debt of the oil-rich country, on a par, among others, with Turkey, Ukraine, Serbia, and Brazil.
The rating, accompanied by a stable outlook, should help attract foreign direct investment and allow Nigerian companies to borrow money by issuing bonds.
The development, likely to be welcomed by the Nigerian government, came as Nigerian militants released four foreign oil workers kidnapped this month, despite threatening to continue attacks on the nation's oil industry.
One of the most crucial factors in the ratings decision was the government's agreement last year with the Paris Club of creditor nations that culminated in Nigeria “extinguishing” all of $31bn of debt originally owed to the group by April this year, said Veronica Kalema, director at Fitch's sovereign ratings group.
The agency estimates the government public debt burden will be equivalent to just 17 per cent of gross domestic product by the end of this year, compared with 66 per cent in 2004. Fitch said that Nigeria's rating was “underpinned by the current government's strong commitment to economic reform, including measures to improve governance, tackle corruption, accelerate privatisation and rationalise the banking system”.
With public foreign debt of a little over $5bn, compared with $42bn of international reserves forecast by the end of the year, Nigeria will be a net external creditor nation.
But some analysts viewed the rating as too generous. Richard Segal, chief strategist at Argo Capital, the hedge fund, said the rating reflected net creditor status but that it was “a net creditor with an erratic track record”.
Tim Ash, emerging markets analyst at Bear Stearns, said the country had been “perennially in default on bilateral debts” and had had long track-record of problems with official creditors.
He added: “I feel a bit uncomfortable with the rating, given the huge over-dependency of the economy on oil, the history of strained relations between the federal and state level governments, and political, social and inter-ethnic conflicts.”
Fitch warned investors about social unrest andviolence in the oil-producing Niger Delta region.
There is the risk that political and social tensions might intensify in the run-up to the presidential elections in 2007.
Mr Ash said anotherconcern was that Nigeria would see a big increase in commercial debt, creating potential problems for the future.

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