Nigeria’s Lagos State Downgraded

Frontier Friday: Fitch Downgrades Nigeria‘s Lagos State to ‘B+’; Outlook Stable

Fitch Ratings has downgraded the long-term foreign currency Issuer Default Rating (IDR) of Nigeria’s Lagos State to B+ from BB-, with a “stable outlook.” When the ratings agency made this change, on June 30, it cited a “material change in the creditworthiness of the issuer.”

Under the European Union’s regulations pertaining to credit rating agencies (CRAs), the publication of International Public Finance reviews is subject to restrictions and must occur according to a predetermined schedule, except when CRAs must deviate from this schedule in order to comply with their legal obligations.

The agency interprets this provision as allowing it to publish reviews when appropriate. In the case of Lagos State, the deviation was caused by the sovereign downgrade.

According to the published Sovereign and Local and Regional Governments Rating Review Calendars for 2016, the next review date for Lagos State was scheduled for September 2.

KEY RATING DRIVERS

The downgrade reflects the application of Fitch’s “International Local and Regional Governments Rating Criteria – Outside the United States.” Under these specific criteria, a local or regional government can be rated above the sovereign only in exceptional circumstances. Following the downgrade of Nigeria’s long-term foreign currency IDR on June 23, the agency therefore gave Lagos State the same rating as the sovereign.

RATING SENSITIVITIES

Lagos State’s ratings are capped by the sovereign, according to Fitch. A downgrade of the sovereign’s ratings would necessarily lead to corresponding action on Lagos State’s IDR. In the absence of a direct sovereign downgrade, the decline of Nigeria’s operating margin to 30 percent; unfavorable changes in the Nigeria’s tax policies; the national debt rising beyond Fitch’s expectations of 350 billion nairas to 400 billion nairas over the medium-term; and economic instability, even at the local level, could all have led to a downgrade in any case.

A sovereign upgrade could be reflected in Lagos State’s ratings, provided that improvements in budgetary performance result in debt levels at equivalent to the total budget (about 400 billion nairas).

Further improvements in the local economy resulting in an additional boost to internally generated revenues would also have a positive effect on Lagos State’s ratings.

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