Lagos State Gets ‘AA (nga)’ Ratings from Fitch

Fitch Ratings, renowned global rating agency,  has revised the Outlook on Lagos states’ ‘National Long-term rating’ to Positive from Stable, and subsequently affirmed it at 'AA(nga)'.

The agency has simultaneously affirmed the Long-term foreign and local currency ratings at 'BB-' with Stable Outlooks, Short-term foreign currency rating at 'B' and the Long-term ratings of the N50billion and N57.5billion bonds, maturing in 2014 and 2017 at 'BB-' and 'AA(nga)'.

The agency issued a statement yesterday with several key indicators affirming the robust Lagos state management – (full text of statement).

Key Rating Drivers
The Outlook revision reflects the state's increasing sophistication in management reflected by improving transparency and debt management amid moves towards a balanced budget by 2015 from a peak deficit of 25% of revenues in 2012 according to preliminary figures, and a stable debt cover ratio by the current balance around three years.

A growing proportion of bond issues, with fixed repayment schedules, longer maturities and monthly provisions intothe debt reserves fund, are replacing the traditional concentration of short-term bank loans. Fitch views this as a sign of the state's improving debt management.

Together with budgets and quarterly performance reports, Fitch  notes continual improvements in transparency and governance.

Fuelled by public and private investments, as well as an estimated population of about 20 million according to state officials, Lagos's diverse economy is the leading contributor to Nigerian GDP. Fitch expects the 10% growth in the local economy and the state's  plans to widen the tax base and improve collection methods to boost local tax

receipts towardsN330billion by 2015, up from N200billion in 2012, edging towards 80% of annual revenues from 70% of income in the late 2000s.

Maintenance costs for infrastructure built and provision of social services such as health and education could add pressure to Lagos's budget.

However, Fitch expects the state's commitment to streamlining costs coupled with the maintenance of a steady employee headcount to contain their growth to about 10% per annum over 2013-2015. Rising energy prices meant costs grew by about 25% in 2012, and Fitch expects Lagos's operating expenses to rise to about N230bn by 2015 from N185billion in 2012.

Fitch expects capital spending to remain high at about N250 illion per year over the medium term, as the state continues to invest in transport, water, health, education and social protection.

Despite interest expenses rising towards NGN40bn by 2015, the state's self-financing ratio of investments will remain strong with the current balance funding about 75% of capital expenditure from an average 65% in 2010/12.

The state's debt will likely stabilise around NGN350bn by 2015, net of repayment provisions, with bonds representing about 50% of total debt from about 30% in 2009.

As Lagos stands out for its low dependence on federal allocation and high tax generation, the state was allowed to incur debt accounting for about 100% of revenues rather than the 50% limit stated by Nigerian borrowing guidelines for subnationals.

The debt service coverage ratio could likely remain at around 2.5x the operating balance offering additional comfort of debt service sustainability.