UPDATE 2-Fitch revises Nigeria's credit outlook to negative

Fri Oct 22, 2010 6:19pm BST

* Revision reflects depletion of oil savings, election risk

* Little impact seen on forthcoming Eurobond pricing

* Wealth fund, power privatisation unlikely before election

(Adds analysts' comment, details)

By Daniel Bases and Nick Tattersall

NEW YORK/LAGOS, Oct 22 (Reuters) - Fitch Ratings on Friday lowered its sovereign credit outlook on Nigeria to negative from stable, citing the depletion of its windfall oil savings and heightened political uncertainty ahead of elections next year.

Nigeria's rating of BB-minus, three notches below investment grade, was affirmed, Fitch said in a statement.

The ratings agency said continued withdrawals from the excess crude account (ECA), into which Africa's biggest oil producer saves crude oil earnings above a benchmark price, and lower forex reserves were a threat to economic stability.

"The depletion of the ECA and continued gradual fall in international reserves at a time of high oil prices and record high oil production is a major concern," sovereign ratings analyst Veronica Kalema said in the statement.

"In addition, elections in the first half of next year have increased short-term political uncertainty," she said.

Standard & Poor's rates Nigeria one notch lower at B-plus.

Analysts said the Fitch revision was unlikely to affect the pricing of Nigeria's forthcoming $500 million debut global bond, which it plans to issue by the end of the year to establish a benchmark in the international market. [ID:nLDE69E1JS]

"Ahead of its maiden Eurobond, the market implications of the Fitch outlook revision are probably limited," said Razia Khan, lead economist for Africa at Standard Chartered.

"However, there is considerable market expectation that any eventual external debt issuance by Nigeria is likely to trade tighter than similarly-rated peers," she said.

The excess crude account is meant to guard sub-Saharan Africa's second biggest economy against sharp drops in world oil prices and was a pillar of reforms launched in 2003 backed by the International Monetary Fund.

But there is no clear legal basis to determine how ECA funds should be shared between the federal, state and local governments and the savings have fallen to less than $500 million from $20 billion in 2007 amid political wrangling.

President Goodluck Jonathan last month sent a bill to parliament to create a sovereign wealth fund, which the government says will give a more transparent and firmer legal basis to manage oil savings. [ID:nLDE68C1E2]

But Fitch said it would be a challenge to implement this ahead of the elections, likely to be held in April.

POLITICAL UNCERTAINTY

The presidential race is set to be the most fiercely contested since the end of military rule more than a decade ago, with no clear consensus candidate in the ruling People's Democratic Party (PDP) for the first time since then.

Jonathan is broadly considered the front runner but he faces a tough battle convincing some ruling party elders to back his election bid and jettison a gentleman's agreement that means the next president should be a northerner.

The unwritten pact in the PDP is meant to prevent tribalism and regional rivalries becoming a factor in federal politics by ensuring power rotates every two terms between north and south. [ID:nLDE68H047]

Jonathan is from the southern oil-producing Niger Delta and inherited the presidency after the death of northern President Umaru Yar'Adua this year part-way through his first term.

"Political risk has been heightened by the end of the zoning agreement within the PDP ... This could give rise to instability in the Niger Delta or in the northern states," Fitch said, noting any unrest in the oil delta would hit the economy.

Kayode Akindele, a director at Lagos-based Greengate Strategic Partners, said the fixed tenure of figures such as the central bank governor and head of the capital markets regulator meant reforms were unlikely to be derailed.

"Key members of the economic management team such as the Central Bank Governor and the Director General of the SEC are insulated ... so the shape of the reforms will more likely continue under any new government," he told Reuters.

Fitch said Nigeria's current rating was constrained by low per capita income, weak transparency and governance in addition to infrastructure deficits such as power shortages.

But it said robust non-oil sector growth, low public and external debt ratios and a net external creditor position much stronger than peers supported the rating.

It said it saw little concrete progress until after the elections on privatising the power sector, a multi-billion dollar plan which could end chronic electricity shortages and help unlock economic growth. [ID:nLDE69D1JL]

But it noted costs arising from the AMCON asset management company, set up to soak up bad loans from banks rescued last year in a $4 billion bailout, would still leave Nigeria's debt ratios comfortably below rated peers. [ID:nLDE68R1V8] To read the full text of Fitch's statement, click [ID:nWNA2616] (For more Reuters Africa coverage and to have your say on the top issues, visit: af.reuters.com/ )