The ratings agency said the decision to revise the outlook was based largely on the government’s response to the global economic downturn and the sharp fall in the price of oil. "We believe the adverse terms of trade shock will hurt Nigeria's credit profile both on the fiscal and external side,” S&P credit analyst Ben Faulks said.
Nigerian President Umaru Yar’ Adua recently conceded that government spending would need to increase by 17% on the year before. S&P called Mr Yar’ Adua’s spending proposals optimistic. “They are based on a rise in oil production that may be difficult to attain given long-standing constraints on output stemming from unrest in the Niger Delta,” the ratings agency said. S&P also forecast a current account deficit of 7.2% of gross domestic product (GDP) in 2009, up from an estimated 6.3% of GDP surplus in 2008.
Nigeria’s Central bank Governor Chukwuma Soludo imposed controversial currency controls in late 2008 in order to protect the country’s dwindling foreign currency reserves. S&P said the controls would hurt local banks access to cross border funding and would weaken portfolio investor confidence.
The agency also said it expected the quality of banks' credit and security portfolios to weaken given the turbulence in local capital markets and the sudden slowdown in economic growth. It has forecast bank lending growth to fall sharply to 6% in 2009, following an estimated average of more than 80% over the past two years, which, S&P said, will in turn constrain overall GDP growth to 1.5% this year.
“The negative outlook reflects the increased risk that the institutional response to falling oil revenue will result in a continued worsening of the business environment and a deterioration of Nigeria's balance sheet beyond our central assumptions," Mr Faulks said. "The ratings are unlikely to be raised in the near term given Nigeria's deteriorating terms of trade outlook and the opacity of public accounts.”
