Archive for August, 2009

Iraq: Just asking the question…

August 19, 2009
Iraqi Foreign Ministry after a bomb attack Wednesday.  Source: NYTimes Iraqi Foreign Ministry after a bomb attack Wednesday. Source: NYTimes

The question is:  Was it the right for the United States to announce its withdrawal from Iraq in order to focus on the war in Afghanistan? 

See this link for a video on the bomb attacks in Iraq.  Attacks in Iraq. Source: NYTimes

Arguments on both sides of the issue are convincing.  Obama got elected by single-mindedly attacking Bush’s policy on Iraq including, until recently, the “surge,” which dramatically reduced internecine violence in that country.  Now, just as he must do on health care reform, the President has to follow through on his election pledges or and others on his left flank will never forgive him.  Yet McCain this time last  year said the job in Iraq wasn’t finished, and the Democrats took his “one hundred years” quote out of context to convince the American people that McCain planned on staying in Iraq for, well, a hundred years.  Now, Iraq may be spinning out of control again, and it may be because of a too-precipitous pullout of American forces.  Barack Obama made the point last year on the campaign trail that, unlike Hillary Clinton, he has good judgment, never supporting an invasion of Iraq, even making a speech to that effect in the Illinois state legislature, where grandstanding on the issue had no policy effect at all.  Putting aside whether we should have invaded Iraq to rid the world of this dictator with bad intentions if not bad weapons, it is a legitimate debate whether we should wind down Iraq, a country central to stability in the Middle East — given its location, ethnicity, and oil wealth, and wind up Afghanistan, arguably a mountainous backwater that has bled imperialists from Russia to Britain to the United States for centuries.  True, instability in Afghanistan triggers instability in nuclear-armed Pakistan.  I said there were good points on both sides of the issue.  I merely wish to get under the teflon a little and question the wisdom of President Obama’s foreign policy choices.

Russia: Fitch Ratings Pessimistic on Sovereign, Banks

August 18, 2009

Fitch Ratings, one of the three global rating agencies, published reports this week on the state of play in Russia.  The government of Russia’s BBB rating was affirmed, but the Outlook for the rating (i.e., where the rating is likely to go in the next two years) remains negative.  Russia has been more negatively affected by the global downturn than other Emerging Markets (with GDP down over 10% annualized in the first half of this year).  Fitch quotes these reasons why:

“First, it [Russia] was highly exposed to the shocks to global commodity prices and cross-border capital flows, which were of the order of 25% of GDP. Second, monetary policy was overly loose, external borrowing and domestic credit growth was excessive, and the economy was overheating prior to the crisis. Third, vulnerabilities were exacerbated by structural weaknesses including an undiversified economy, a weak banking sector, high inflation, FX mismatches on private sector balance sheets, weak institutions and a difficult business climate – which the authorities failed to address sufficiently during the boom years.”

In addition, Fitch banking analysts expect non-performing loans at Russia’s banks to top off at 25% of total loans, up from 14% in June.  Under its “pessimistic” scenario, Russia’s NPLs rise to 40% and losses amount to 24% of total loans.  Press releases on the Sovereign and the banks are below.

” Fitch Affirms Russia at ‘BBB’; Outlook Negative   04 Aug 2009 7:12 AM (EDT)

Fitch Ratings-London-04 August 2009: Fitch Ratings has today affirmed the Russian Federation’s Long-term foreign and local currency Issuer Default ratings (IDR) at ‘BBB’ with Negative Outlooks. At the same time, the agency has affirmed the Short-term foreign currency IDR at ‘F3’ and the Country Ceiling at ‘BBB+’.

“The Russian economy and sovereign balance sheet have been severely affected by the global financial crisis and, despite signs of economic and financial stabilisation since March, risks to creditworthiness remain on the downside,” says Edward Parker, Head of Emerging Europe in Fitch’s Sovereigns team.

Russian GDP contracted 10.1% y-o-y in H109, a far worse performance than in other larger emerging markets, and foreign exchange reserves (FXR) have fallen by around USD200bn over the past 12 months. The severe impact of the global crisis on Russia reflects three sets of factors. First, it was highly exposed to the shocks to global commodity prices and cross-border capital flows, which were of the order of 25% of GDP. Second, monetary policy was overly loose, external borrowing and domestic credit growth was excessive, and the economy was overheating prior to the crisis. Third, vulnerabilities were exacerbated by structural weaknesses including an undiversified economy, a weak banking sector, high inflation, FX mismatches on private sector balance sheets, weak institutions and a difficult business climate – which the authorities failed to address sufficiently during the boom years.

Fitch forecasts Russia’s real GDP to decline 7% in 2009, before increasing 3.5% in 2010, helped by the inventory cycle, base effects, higher oil prices and a large fiscal stimulus. However, the length and depth of the recession is a downside risk and will have implications for bank asset quality, public finances and, potentially, political pressures on the Russian authorities. Fitch views the banking sector as a key credit weakness. In its base case, the agency projects impaired loans to increase to 25% of total loans by end-2009, requiring recapitalisation of at least USD22bn in addition to the USD24bn injected since Q308. The central bank faces a challenge in providing sufficient liquidity to the banking sector, while reducing inflation to single-digits and avoiding excessive rouble volatility.

The Russian private sector faces maturing external debt payments of USD137bn this year, which may be difficult to refinance in current market conditions. Fitch estimates the roll-over rate was 64% in Q109. Capital outflows and the dollarisation of household bank deposits have eased since the completion of the rouble devaluation process in February, but could re-emerge in the event of renewed financial stress. Nevertheless, overall the country has a strong external liquidity position, with FXR of over USD400bn, and it is a net external creditor to the tune of 17% of GDP at end-2008, compared with a net debtor position for the ‘BBB’ range ten-year median of 13%.

Public finances are a key sovereign rating strength. General government debt was only 8% of GDP at end-2008, well below the ‘BBB’ range 10-year median of 35%. Moreover, Russia has an aggregate USD184bn in its Reserve Fund (RF) and National Wealth Fund (at end-June, equivalent to around 15% of projected 2009 GDP) providing a strong liquidity position to finance budget deficits and to run counter-cyclical fiscal policy. However, Fitch forecasts the recession, fall in oil prices and anti-crisis measures to cause the federal budget to swing from a surplus of 4.1% of GDP in 2008 to a deficit of 8.5% in 2009 and 6% in 2010. Even with a return to the eurobond market next year, this will cause the RF to be depleted in 2010 and require significant fiscal consolidation over the medium-term.

A renewed deterioration in global economic prospects, oil prices and risk appetite leading to a material weakening in the sovereign balance sheet or macroeconomic instability could result in another downgrade (Fitch downgraded Russia’s ratings by one notch on 4 February 2009). Negative shocks from the banking sector or elevated financial pressures from low roll-over rates on external debt or large-scale capital flight would also be negative for the ratings. Furthermore, a failure to narrow the budget deficit, and a consequent rapid increase in government debt and depletion of the sovereign wealth funds could lead to downward pressure on the ratings in the medium-term. In contrast, a material easing of a combination of these risks could see the Outlooks revised to Stable.

Contacts: Edward Parker, London, Tel: +44 (0)20 7417 6340; David Heslam, +44 (0)20 7417 4384.

Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email:”

“Fitch Ranks 57 Russian Banks by Loss Absorption Capacity  
14 Aug 2009 5:07 AM (EDT)

Fitch Ratings-London/Moscow-14 August 2009: Fitch Ratings released a report today ranking 57 rated Russian banks based on their loan loss absorption capacity. Fitch considers this capacity to be currently weak at 10 of the banks reviewed, although most of the 10 could likely rely on capital support from shareholders, and moderate at a further 14.

The extent of Russian banks’ asset quality deterioration, their loss absorption capacity and contingency recapitalisation plans are likely to be the main drivers of rating actions over the next 12 to 18 months. Fitch-rated banks reported an average 14% impaired loans (5% non-performing and 9% restructured) at 1 June 2009, up from 10% (3% and 7%) at 1 March.

“However, management figures prepared at a still relatively early stage of the credit downturn are unlikely to fully capture the eventual full extent of asset quality problems,” says Alexander Danilov, Senior Director, Fitch’s Financial Institutions group in Moscow. “The gradual deterioration of banks’ asset quality metrics is likely to continue during the second half of 2009 and into 2010.”

Fitch had previously stated that it expects impaired loans at Russian banks to reach 25% in a base case scenario, resulting in ultimate loan losses of 12.5%. Under a more pessimistic scenario, impaired loans could reach 40% resulting in loan losses of 24%.

Fitch ranked the loan loss absorption capacity of the 57 rated Russian banks to demonstrate their relative vulnerability to loan losses. The agency assessed the banks’ loss absorption based on the maximum reserves to loans ratio they could have sustained at 1 June 2009 without breaching minimum regulatory capital requirements. However, Fitch notes that a lower or higher loss absorption capacity, as defined by this measure, does not automatically mean that a bank is more or less vulnerable to potential loan impairment, as credit losses at individual banks may significantly diverge from Fitch’s average sector assumptions.

For 10 of the 57 banks – VTB24, Rossiya, Bank of Moscow, Swedbank (Russia), VTB, Moscow Bank for Reconstruction and Development, AK Bars, Rosbank, Orgresbank and Unicredit (Russia) – the maximum reserves/loans ratio is below 10%, and Fitch thus regards these banks’ loss absorption capacity as currently weak. However, Fitch notes that the capacity of two of these banks – Bank of Moscow and VTB – should strengthen significantly as a result of upcoming equity injections, and that most of the other eight banks also have relatively strong shareholders, which the agency would expect to contribute new capital in case of need. Fourteen of the banks reviewed had moderate loan loss absorption capacity (a maximum reserves/loans ratio of 10%-15%), while capacity was significant at 14 banks (15%-20%), solid at 11 (20%-32%) and strong at eight (more than 32%).

Banks’ loss absorption capacity has increased significantly in recent quarters as they have received new capital, albeit mainly in the form of subordinated debt, and cut back on loan growth. However, this capacity still remains moderate on a sector basis relative to potential credit losses.

“The recently approved government programme to support banks’ tier 1 capital, if successfully implemented, could help to make recapitalisation a manageable process,” says James Watson, Managing Director, Fitch’s Financial Institutions group, “Defaults would still be possible, in particular at banks with major asset quality or corporate governance failures, although recent government actions suggest a determination to avoid destabilising, unmanaged failures at larger institutions.”

The report, entitled ‘Russian Banks: Measuring Their Loss Absorption Capacity’, focuses mainly on asset quality deterioration trends and banks’ loss absorption capacity. It follows and expands on the July 2009 presentation, entitled ‘Asset Quality Problems Weigh on Russian Bank Ratings’, which provided a summary of Fitch’s sector wide credit loss expectations and recapitalisation requirements. The report and presentation are available at

Contacts: Alexander Danilov, James Watson, Moscow, Tel: +7 495 956 9901.

Media Relations: Marina Moshkina, Moscow, Tel: +7 495 956 9901, Email:; Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email:”

Brazil: Trouble for Lula’s Heir-Apparent

August 18, 2009
President Lula and Candidate Dilma Rousseff.  Source:  Google Images President Lula and Candidate Dilma Rousseff. Source: Google Images

Dilma Rousseff, the less-than-glamorous heir-apparent to Brazil’s leftist President Lula, is being accused of exerting pressure on a government official to whitewash an investigation into a political ally.  See FT article on the subject.  These corruption investigations snarl Brazil’s Congress all the time, and some blow over, while others balloon.  What will happen to this one could affect Dilma’s chances in the presidential election of 2010, which is getting under way.  Dilma, former guerrilla tortured under Brazil’s military regime in the 1970s, Lula’s chief of staff, energy minister and chairwoman of Petrobras, Brazil’s part-state-owned energy company, may not coast as easily into the Brazilian presidency as Barack Obama did into the White House.  Stay tuned…

China & Ecuador: They need each other

August 18, 2009
Source: Google Images Ecuador Source: Google Images

The FT reports today that China is extending a much-needed $1 billion loan to the government of Ecuador, one of the worst-run countries on the planet, as a downpayment on oil deliveries to the Asian juggernaut.  Ecuador has oil, as well as other assets, including in tourism (for example, the Galapagos Islands, the Andes, and charming Quito), but it has been mismanaged by elites for decades, leaving its indigenous population impoverished and its debt in default.  China needs oil.  These countries need each other.  Read an earlier post on China and Latin America.

Colombia: US Democrats’ Hypocrisy?

August 18, 2009

Are the Democrats hypocrites on Colombia and on Free Trade?  With Obama in tow, last year they killed the Colombia FTA legislation promoted by President George W. Bush (I know you don’t like him), who really got it right on hemispheric free trade and on U.S. ally Colombia.  The Dems whined about abuses by the government of Alvaro Uribe, who has in fact made great strides in ending Colombia’s nasty guerrilla war.  Read posts I wrote in the past on Colombia and on trade.

Now, President Obama, who has adopted many of the policies he savaged when they were Bush’s (e.g. targeted killings in Afghanistan to name one) is backing greater U.S.-Colombia military ties, which had already been deepened under Mr. Bush.  So, much so that Obama’s erstwhile buddy, Chavez, whom he shmoozed with earlier this year, refuses to normalize relations with his neighbor to the west.  Yet Obama cannot so easily backtrack on his wrong-headed kaybashing of Colombia FTA, based on the AFL-CIO’s trumped up charges of abuse against the Uribe government. 

Just keeping score…

Brazil: Another quiver in its bow

August 17, 2009
Brazil's President Lula with Petrobras's CEO and Lula's Heir-Apparent, Dilma Rousseff  Source: Latin American Herald Tribune
Brazil’s President Lula with Petrobras’s CEO and Lula’s Heir-Apparent, Dilma Rousseff Source: Latin American Herald Tribune

Brazil’s persistent economic weakness over the years has been its external balance sheet — heavy indebtedness to foreigners, weak foreign trade sector, and low external liquidity (e.g. low fx reserves).  This was in addition to a heavy government debt burden (government borrowing abroad in fact drove the fragile balance of payments), a poor business climate (a huge tax burden, heavy regulation and a state-dominated economy) and huge social challenges (e.g. poverty, wealth inequality, crime). 

Yet since the arrival of President Fernando Henrique Cardoso in 1994, whose stabilization and market-oriented policies were largely continued by President Lula since 2002, Brazil has improved somewhat on all these fronts.  What has changed like night to day is the external balance sheet  — as the country’s diversified commodity exports have fueled growth of such economic smokestacks as China.  Brazil, traditionally an energy importer — both hydro and fossil — due to its heavy consumption needs, has recently become a net oil exporter.  No longer do higher energy prices mean balance of payments problems for Brazil, but rather rising fx reserves. 

And, the news keeps getting better. With the technology available for deep-sea drilling, Brazil is set to become a quite sizable oil exporter (read a NYTimes article on the subject).  Petrobras, the part-government-owned energy company, is set to take the lead in developing the deep-sea fields.  It is no accident that Lula’s heir-apparent, Dilma Rousseff, is chairwoman of the board of directors of Petrobras.

Brazil’s fx reserves should continue to mount, providing an almost China-like fortress against external shocks.   This should provide the country with the room it needs to confront its other ills, enumerated above, and move higher and higher among the ranks of today’s Rising Powers.

China, Latin America and the US

August 17, 2009

China: Learning to enjoy the Brazilian bear hug.  Presidents Lula and Hu.  Source: Xinjuanet

What would President Monroe say?

An Economist article discusses the growing presence of Great Powers, especially China, in Latin America, flouting nearly two centuries of U.S. dominance in the region, since the articulation of the Monroe Doctrine in the early 1820s.  In the near term, this worry is overdone.  Longer-term, if the U.S. continues to damage its sovereign creditworthiness, i.e. by not putting in place a medium-term fiscal consolidation program (that is, to reduce America’s rising government debt) — a program that should include putting health care reform on hold, then America’s relative decline will accelerate and this will affect its projection of power in the Western Hemisphere. 

In the 1820s, as revolution in Spain led to unrest in its colonies in the Western Hemisphere, the Holy Alliance of autocratic east European courts — Russia, Austria and Prussia, threatened to intervene in these colonies.  President Monroe in 1823, backed by the British Navy, warned Europe that any extension of European power to the Western Hemisphere would be “dangerous to our [U.S.] peace and safety.”

Nowadays, as the world moves increasingly toward a multipolar system, power projection in Latin America is largely in the form of commerce.  China, India and others seek, above all, the region’s raw materials to fuel their rising economies.  True, with economic influence comes political influence.  True as well, such powers as Russia and Iran seek direct political influence through arms sales and energy deals with the likes of Chavez’s Venezuela, Cuba, and Evo Morales’s Bolivia.  But these countries are on the fringe.  More of interest to U.S. policymakers are China’s economic relations with the major economies of the region, notably Brazil.  China’s economic relations with Brazil have been hand in glove — raw materials fueling a manufacturing juggernaut, while with Mexico, they have been competitive.  Brazil is also a manufacturing nation and will one day find China an unwelcome competitor. 

So, the thrust of the foreign “intervention” is commercial and good for Latin America.  This is good for the United States as well, insofar as China supports growth in the region and the U.S. no longer has to be relied on so heavily as the source of demand and investment for the hemisphere.  In previous U.S. downturns, Latin countries hovered on the brink of default (or in fact defaulted), whereas this crisis they have weathered, due in part to demand from China and elsewhere. 

China, for its part, is “intervening” in Latin America as a rule-abiding member of the global capitalist system, wrought by the U.S. and its allies.  This should not worry American policymakers.  Sure, they should keep an eye on the mischief-making of countries like Iran and Russia that seek to upset the U.S. in its own backyard, much as Krushchev did with Cuba in the middle of the last century (however less dramatic and threatening the current mischief-making is).  Again, the smartest thing U.S. policymakers can do is get America’s fiscal house in order — by first of all, postponing health care reform — and revive the formidable U.S. economy — upon which the country’s power projection is based — not least through continued banking overhaul, workout of real estate loans, policies to increase household savings, and a reform of monetary policy (by discarding Greenspan’s discredited approach).

China: Update on Rio Tinto Corruption Case

August 10, 2009
Australian Mining Co., Rio Tinto  Source:
Australian Mining Co., Rio Tinto Source:…

Australian mining giant Rio Tinto knows that when it does business with a sovereign government, it is dealing with an entity that writes, executes and adjudicates laws on its territory.  Read about the China-Rio Tinto issue in a previous post

Every multinational knows, especially those in industries such as mining and energy that operate in funky locales, that the sovereign can seize your assets, throw your officers in prison, and undertake other such mischief as it pursues its interests, whether economic or political.

So, as the Chinese goverment has orchestrated an assault on Rio Tinto in recent weeks, claiming corruption and over-invoicing, it is sending a message to Rio Tinto, its backers in the Australian government, and the wider world — you can make money over here, but do not cross us.  A NYTimes article today suggests that the Chinese government is easing its pressure on Rio Tinto as negotiations over a mining contract resume, which became acrimonious in late June.  

Lest we forget, all sovereigns, even liberal democracies, have the power to encroach on private property.  A libertarian paradise exists nowhere on Planet Earth.  “Eminent domain” is a concept in the United States, whereby the state has the inherent right to seize private property for its purposes, be it a public highway, utility, a military facility.  Financial compensation by the goverment is due the private owner of the seized asset.  You would feel like you were up against the Chinese government, if your local mayor decided he needed to build a road across your lawn.  Hence the American phrase, “You can’t fight City Hall.” 

With the retreat of colonialism after World War II, a wave of nationalizations and expropriations by sovereigns in former colonial lands changed the landscape of international commerce.  Does anyone remember the Oil Embargo of the 1970s?  With the arrival of the Washington Consensus in the 1990s, which despite what naysayers say is still largely the consensus, most reforming emerging market sovereigns resist nationalization and expropriation because this destroys a country’s business climate and limits the inflow of capital.  Almost everyone knows this, unless you’re Hugo Chavez or Evo Morales.  Note the fact that the Brazilian government under President Lula, an icon of the Latin American left, was on the receiving end of an expropriation threat, when Bolivia’s Evo Morales called for the nationalization of natural gas refineries owned and operated by Petrobras, Brazil’s energy behemoth, a few years ago.

So, shed no tears for Rio Tinto…

Russia-Turkey deal: the Czars would be jealous

August 7, 2009
Peter the Great sought a warm-water port on the Black Sea.  Source:
Peter the Great sought a warm-water port on the Black Sea. Source:

The NYTimes published an article today detailing a set of energy deals concluded between Russia and Turkey in Ankara, with Prime Ministers Putin and Erdogan present.  The deal was with Russian energy giant Gazprom, allowing state-owned Gazprom access to Turkish territorial waters, a benefit Russian czars and party chairmen since Peter the Great (pictured above — who ruled Russia from 1682-1725) have sought by force (or threat of force).  Now, in true “Western” fashion, Russia, Inc. is signing a business contract that provides benefits to Turkey as well.  Turkey desires to become an energy hub and has obtained a Russian commitment to build a pipeline across its territory.

The Times article explains how Western interests have competed with Russia for energy agreements with Turkey in order to avoid Russian dominance of the Eurasian energy pipeline system, and the consequent vulnerability of energy-hungry Western Europe.  Russia has used pipeline cutoffs before for political purposes, e.g. with the Ukraine.

Turkey for its part, with a less pro-Western government than heretofore, headed by the moderate Islamist AKP party, probably does not mind playing what the Brits over a century ago called, “the Great Game,” or the Great Power competition in the East.  Has Vlad the Great bested Peter??

Don’t Forget Nigeria…

August 6, 2009

…Africa’s second largest economy and a potential rising regional power.

Nigeria, with about $215 billion in GDP last year, follows South Africa and leads Egypt in Africa in terms of the size of its economy, but lags both countries in wealth per head, with roughly $1350 of GDP per capita.  Nigeria relies very heavily on oil exports to fuel its economy.  Recent high oil prices have provided this classic developing country — with its poverty, mineral wealth, political instability and corruption, as well as reforms and emerging institutions —  with strong GDP growth and a strong external balance sheet (foreign exchange reserves in excess of government liabilities to foreigners).  With 155 million people, 250 ethnic groups, many languages, and a 50%-40% Muslim-Christian divide (view map below), this simmering rising power in West Africa is one to watch, if not next year, then some time this century.  Check out the CIA Factbook on Nigeria.

Of note is the ongoing conflict between the government and Islamic militants, putting Nigeria right smack on one of Huntington’s fault lines between civilizations.  See this article on recent unrest

Nigeria: At the Faultline Between Islam and Christianity  Source: Nigeria: At the Faultline Between Islam and Christianity Source:

Of interest as well is Fitch’s report on Nigeria, published last month, when the agency affirmed the country’s sovereign ratings.  See below.

“Fitch Affirms Nigeria at ‘BB-‘/’BB’: Outlook Stable   

03 Jul 2009 6:30 AM (EDT)

Fitch Ratings-London-03 July 2009: Fitch Ratings has today affirmed the Federal Republic of Nigeria’s Long term foreign and local currency Issuer Default Ratings (IDR) at ‘BB-‘ and BB’ respectively. The Outlook is Stable. At the same time, Fitch has affirmed the Short-term foreign currency IDR at ‘B’ and the Country Ceiling at ‘BB-‘.

“Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers,” says Veronica Kalema, a Director in Fitch’s Sovereign Department.

“Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks,” adds Kalema.

The government moved swiftly to base the 2009 budget on a lower benchmark oil price of USD45/barrel (Fitch has a forecast of USD55/barrel for 2009 and the oil price is currently around USD70/barrel). Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget. The domestic debt market provides financing flexibility for the FG and a few sub-nationals that have started to tap it to fund development spending. Nevertheless, sub-nationals face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the ECA. Fitch forecasts small budget deficits at the FG and consolidated government levels and continuing low public debt of 12% of GDP in 2009, well below the ‘BB’ median.

The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20% depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation. The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28% to USD44.8bn in May 2009 since the peak of USD62.1bn in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category. The recent increase in oil prices, if sustained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action.

Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development.

Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness.

Following an average of 6%+ growth in 2004-2008, in 2009 growth will slow to around 3%, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta (ND) insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms.

A copy of the sovereign report on Nigeria will be available shortly on Fitch’s website

Contact: Veronica Kalema, London, Tel:+44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357