Standard & Poors Ratings Services have raised its Nigeria national scale rating on the Nigerian State of Rivers to ngBBB+ from ngBBB, revising the outlook from positive to stable and affirmed their B long-term issuer credit rating
The outlook revision reflects their view that Rivers' ongoing and potential financial management reforms will not materialize - at least to the point of triggering a rating upgrade - within their 12-month outlook horizon. They base their revision on their criteria for outlooks on speculative-grade entities, whereby outlooks only incorporate short-term potential rating changes.
That said, Stand & poor have raised their Nigerian national scale rating on Rivers to 'ngBBB+', indicating their opinion that the state's attempt to modernise its public finances and financial management has already yielded material results, particularly in the areas of information quality and disclosure.
Public finance
Their 'B' long-term rating on Rivers reflects their negative assessment of the Nigerian public finance system, which they view as subject to oil-revenue volatility and, in general, as lacking transparency and accountability. The rating further reflects their view that, despite gradual improvement, the state's financial management still remains low by international standards. In addition, they believe that the state's expenditure flexibility is limited because of large development needs that constrain capital investments.
Rivers' credit quality is supported by its currently strong liquidity position, which is backed by very strong cash flow generation. Other positive factors include Rivers' low debt (although likely to increase) and very healthy operating balance, which derives from favourable revenue arrangements allocating a substantial share of the country's oil revenues to Rivers.
Low starting point
Concerning financial management, which they view as a key element of the state's credit profile, Rivers comes from a low starting point. The government is taking steps to modernize public sector administration, including a substantial information technologies (IT) upgrade, and a move toward greater accountability. They acknowledge an improvement in the state's financial management, especially in the areas of transparency and information disclosure. Nevertheless, they believe that improvements in the remaining areas of financial management--including long-term financial planning, external risk management, budgeting processes, revenue and expenditure management, and the management of government-related entities - are more complex. They therefore anticipate that results could materialise at a slower pace.
The stable outlook reflects Standard & Poor's view that Rivers' budgetary performance will evolve along the lines of their base-case scenario, which the state will continue to implement financial management reforms even though they do not expect that major results will transpire over the next 12 months, and that any substantial borrowing activity will be accompanied by an ISPO. The latter factor would result in debt service being deducted at source by the central government from River's statutory allocation.
Operating revenues
Specifically, they expect Rivers to continue to generate large operating revenues, which together with a NGN150 billion bond issuance in 2011-2012 should enable it to carry out some NGN220 billion in annual investments in the period 2011-2012, and maintain a comfortable liquidity position.
They would consider raising the rating if financial management reforms lead us to believe that Rivers will yield substantive and comprehensive results earlier than they currently anticipate. They could raise their long-term rating on Rivers if the state demonstrates material improvements in several key financial management areas, and they subsequently reassess their contingent liability score for the state.
They would consider lowering the rating if the positive financial management reforms cease while debt accumulates; liquidity ratios worsen significantly; or the state undertakes material borrowing activity without an ISPO before they see substantial improvement in its financial management.
