Economy
Fitch Rates Kaduna State ‘B’; Outlook Stable
By Modupe Gbadeyanka
Fitch Ratings has assigned Kaduna State Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of ‘B’ and a National Long-Term Rating of ‘A+(nga)’. The Outlooks are Stable.
In a statement issued on Friday, Fitch said the ‘B’ ratings reflect Kaduna’s dwindling revenue prospects in line with declining statutory allocations from the central government as a result of weak oil prices. Oil-related revenues account for 70% of Nigeria’s current external receipts and Kaduna’s current revenue.
The ratings also reflect the region’s fast growing debt although servicing requirements will be moderated by government subsidies, concessionary terms and a long grace period. They further take into account the state’s developing economy focused on agricultural activities and low per capita revenue by international standards.
The ‘A+(nga)’ rating reflects Kaduna’s low risk relative to the country’s best risk given strong financial and revenue support from the central government.
The Stable Outlooks factor in Fitch’s expectation that a flexible expenditure framework and a sustainable borrowing capacity will allow Kaduna to weather volatile statutory transfers in the medium term.
According to the statement, the ratings assigned reflect the following rating drivers and their relative weights:
High
Weak Institutional Framework
As with other Nigerian states, Kaduna’s finances are affected by weak revenue predictability, and by high budgeted capital spending being rolled over into following financial years due to a lack of funding and limited implementation capacity. Waning transfers from Federal Accounts Allocation Committee (FAAC) amid the oil sector down-cycle provide renewed stimulus for tax revenue diversification but benefits may be visible only in the medium- to long-term.
Long-term Debt Challenge.
Kaduna State is increasing borrowing rapidly to fund capex in core infrastructure to sustain GDP growth and diversify revenue sources. Total debt at the end of fiscal year 2015 totalled NGN73bn and Fitch envisages it will more than double by end-2018 to 160% of current revenue, to finance projects mainly in the power, transport, water supply, education and healthcare sectors.
Fitch expects annual debt service requirements up to NGN8bn-NGN10bn, which will continue to be covered by the current balance and may be balanced with faster growth of internally generated revenue (IGR) in the medium term. Fitch expects Kaduna’s cash position to remain strong at around NGN30bn, hence providing adequate cushion for debt cash calls in the short-term.
Medium
FAAC Impacting Fiscal Performance
The FAAC is the primary mechanism for funding Nigerian states. Its process, which determines funding levels allocated on a monthly base, is derived from revenues accruing to the federal government, largely sourced from the oil sector. In line with plummeting oil prices and falling production, Kaduna’s statutory allocations declined to NGN52bn or 66%-70% of revenues, a trend Fitch expects to continue in 2016 with a further 20-25% decline.
Under its base case scenario, Fitch expects Kaduna to partially compensate for lower FAAC revenues in 2016 with a flexible expenditure framework that will see spending decline through the economic cycle. We forecast an operating margin of 10% in 2016, down from 16% in 2015 and a 10-year average of 40%. Fitch believes Kaduna can return to its 40% mark over the medium-term if it is able to raise local taxes.
IGR totalled NGN13bn in 2015 or nearly 20% of operating revenue, having languished at around NGN12bn over the last five years. However, given the low level of tax compliance and slowing growth from an agricultural economy, non-oil revenues should increase slowly as the administration pushes to expand the tax base.
Weak Socio-Economic Profile
Within the context of Nigeria, Kaduna’s fast-growing population and a traditionally strong primary sector contribute to weak socio-economic standards, including growing unemployment. A dominant agricultural sector drives the economy while Kaduna’s 2016-2020 plan is focusing on the state’s rich minerals resources by attracting foreign investors to key industrial projects.
Low
Transparency to Stimulate Investments
To attract private and foreign investments, Kaduna’s administration is committed to improving the state’s transparency and disclosure. Fitch believes that the transition from cash to a more sophisticated accrual-based accounting is a credit positive, as it restricts the scope for discretionary initiatives and human errors visible in the past.
RATING SENSITIVITIES
An upgrade could materialise if the operating margin strengthens towards 30% and if the fiscal deficit narrows due to IGR growth or tighter-than-expected cost control.
Conversely, financial debt growth leading to debt-to-current revenue ratios being consistently above Fitch’s expectations could result in a downgrade. Unrest damaging economic prospects or undermining oil-related revenue could also lead to a downgrade.
By Adedapo Adesanya
The Dangote Petroleum Refinery has purchased two cargoes of crude oil from the United Arab Emirates (UAE), marking its first-ever procurement of Middle Eastern crude as it diversifies its feedstock sources ahead of continuous expansion.
According to a report by S&P Global Commodity Insights, the two cargoes will be the first sourced by the 700,000-barrels-per-day refinery from any Middle Eastern supplier, signalling a shift from its traditional reliance on Nigerian, African, and United States crude grades.
The report said the purchases followed the resumption of oil exports from the Middle East after the United States and Iran reached an interim peace agreement that restored confidence in shipping through the Strait of Hormuz.
The refinery, designed primarily to process Nigeria’s light sweet crude, has increasingly diversified its crude slate as operations ramp up. The company sources crude from Brazil, Equatorial Guinea, Angola, Algeria, and the US, among others.
The refinery and the Nigerian National Petroleum Company (NNPC) Plc had agreed on the supply of between 13 and 15 cargoes of Nigerian crude monthly in Naira, but the volumes often fluctuate. In May, the state oil company allocated seven cargoes to the plant, up from five in previous months.
The chief executive of the Dangote Refinery, Mr David Bird, had previously disclosed that these constraints had compelled the company to seek additional crude sources outside Nigeria.
According to S&P Global, the refinery has been broadening the range of crude grades it processes as part of its ambition to operate as a fully merchant refinery. The report noted that in 2025, about 70 per cent of the refinery’s crude imports came from Nigeria, while 24 per cent originated from the United States.
The report added that the refinery’s expansion plans would further increase its crude requirements. Dangote plans to double the refinery’s processing capacity to 1.4 million barrels per day by the end of 2028, a level that would enable it to process about 80 per cent of Nigeria’s recent crude oil production in a single day.
Business Post understands that since NNPC cargoes are cheaper for the refinery because of lower shipping costs, importation of crude could translate to higher fuel prices, with Nigerians possibly buying as high as N1,300 – N1,400 at the pump.
By Adedapo Adesanya
The Federal Competition and Consumer Protection Commission (FCCPC) has expressed concern that Nigerian consumers have yet to benefit from lower prices despite the recent sharp decline in global crude oil prices.
Business Post reports that crude prices currently trade around $69 and $71 per barrel in the international market.
The commission stated on Sunday that following a market surveillance exercise, the review of gantry prices from local refiners, marketers, depot operators and retail outlets showed only token reductions, not aligned with the steep drop in international crude prices.
The chief executive of the agency, Mr Tunji Bello, said that though the FCCPC does not set petroleum prices in a deregulated market, it is mandated by the Federal Competition and Consumer Protection Act, 2018, to promote competition and protect consumers from unfair business practices.
“To be clear, the commission does not regulate or approve petroleum prices in a deregulated downstream market. Our responsibility under the Federal Competition and Consumer Protection Act, 2018, is to promote competitive markets, prevent anti-competitive conduct, and protect consumers from unfair, deceptive and exploitative business practices,” Mr Bello said.
“We are concerned that while dealers often respond swiftly by hiking pump prices whenever crude prices rise, it is curious that it is taking forever for consumers to benefit significantly when crude prices fall. Competitive markets must work fairly in both directions,” he added.
The organisation noted that crude prices fell to about $73 per barrel after a recent ceasefire between the United States and Iran and the reopening of the Strait of Hormuz, down from a peak near $120 per barrel in April.
During the April–May price spike, petrol prices rose to between N1,350 and N1,500 while diesel traded around N2,000. In February, PMS averaged between N800 and N900. Presently, average retail PMS nationwide is about N1,200, with some local refiners listing gantry prices between N1,025 and N1,075.
The FCCPC acknowledged that domestic fuel prices are affected by multiple commercial factors, including refining costs, foreign-exchange movements, logistics, financing and distribution expenses, but said competitive market dynamics should have passed more of the recent international cost declines to consumers.
“Market liberalisation does not diminish businesses’ obligations to compete fairly or consumers’ right to fair treatment,” Mr Bello added. “Where credible evidence indicates conduct that undermines competition, exploits consumers or otherwise contravenes the Federal Competition and Consumer Protection Act, the Commission will investigate and take appropriate enforcement action,” urging consumers to report suspected anti-competitive conduct, misleading pricing or other unfair market behaviour via its established complaint channels.
By Adedapo Adesanya
Four securities weakened the NASD Over-the-Counter (OTC) Securities Exchange by 1.95 per cent on Friday, erasing N41.17 billion from the bourse, which had its market capitalisation at N2.567 trillion compared with the previous session’s N2.618 trillion.
In the same vein, the NASD Unlisted Security Index (NSI) decreased at the close of business by 85.28 points to 4,277.07 points from 4,362.32 points.
The price decliners were led by 11 Plc, which gave up N20.50 to sell at N200.50 per share compared with the preceding day’s N221.00 per share, FrieslandCampina Wamco Nigeria Plc dropped N16.94 to close at N155.20 per unit versus Thursday’s closing price of N172.14 per unit, Central Securities Clearing System (CSCS) Plc went down by N2.11 to N84.68 per share from N86.79 per share, and Afriland Properties Plc lost 11 Kobo to end at N16.74 per unit, in contrast to the N16.85 per unit it closed a day earlier.
During the trading day, the value of transactions jumped by 172.1 per cent to N29.9 million from the preceding session’s N10.9 million, and the volume of trades soared by 136.5 per cent to 955,096 units from the previous 403,901 units, while the number of deals went down by 11.4 per cent to 31 deals from 35 deals.
Great Nigeria Insurance (GNI) Plc remained the most active stock by value on a year-to-date basis, with 3.4 billion units valued at N8.4 billion, followed by Infrastructure Credit Guarantee (Infracredit) Plc with 2.3 billion units worth N6.5 billion, and CSCS Plc with 68.6 million units sold for N4.7 billion.
GNI Plc also ended the session as the most traded stock by volume on a year-to-date basis, with 3.4 billion units exchanged for N8.4 billion, trailed by Infracredit Plc with 2.3 billion units traded for N6.5 billion, and Resourcery Plc with 1.1 billion units transacted for N415.7 million.
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