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Lessons From El Rufai & Fitch Rating Of Kaduna





By Gurgur Japheth

Fitch ratings is an international credit rating agency based out of New York City and London. The company's ratings are used as a guide to investors as to which investments are most likely going to yield a return.
It is based on factors such as how small an economic shift would be necessary to affect the standing of the bond, and how much, and what kind of debt is held by the company.
In a document released by the rating agency Link to Fitch Ratings’ Report: Kaduna State – Rating Action Report, November 25 (Fitch) Fitch Ratings has assigned Nigeria’s Kaduna State Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of ‘B’ and a National Long-Term Rating of ‘A+(nga) see: fitchratings.com
The Outlooks are Stable. 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.

Along with Moody's and Standard & Poor's, Fitch is one of the top three credit rating agencies. Its rating system is very similar to S&P's in that they both use a letter system.
Some examples of letter ratings include:
AAA - reliable and stable
AA - quality with a bit higher risk
A - economic situation could affect finance
BBB - middle class-an acceptable risk
BB - more prone to economic changes
CCC - vulnerable, dependent on current economic situation
D - has defaulted before, high risk to again

A bond rating is a grade given to bonds that indicates their credit quality. Private independent rating services such as Standard & Poor's, Moody's Investors Service and Fitch Ratings Inc. provide these evaluations of a bond issuer's financial strength, or its the ability to pay a bond's principal and interest in a timely fashion.
Credit quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. As the term implies, credit quality informs investors of a bond or bond portfolio's credit worthiness, or risk of default.
An individual bond or bond mutual fund's credit quality is determined by private independent rating agencies such as Standard & Poor's, Moody's and Fitch. Their credit quality designations range from high ('AAA' to 'AA') to medium ('A' to 'BBB') to low ('BB', 'B', 'CCC', 'CC' to 'C') (Milan/London Report, 2016).
Investors interested in the safety of their bond investments should stick to investment grade bonds ('AAA', 'AA', 'A', and 'BBB'), while other investors willing and able to accept a higher level of risk could consider lower credit-quality bonds.
In 2015, N166billion was approved as Kaduna State 2016 Budget for the year under review. The budget was quantitatively primed on the ratio of 60:40 in favor of Capital Expenditure.
The yearly fiscal projections are a microcosm of a medium term crowd-sourced Five-Year Development Plan for social and economic advancement of the State, tagged "Restoration Development Strategy".
The 2017 Estimates, also on same Budget-flow Quadrant of 60:40 is already in the House of Assembly for legislative imprimatur.
How far has the 2016 budget been deployed toward Capital is subject to national enquiry as it appears Mallam El-Rufai is a prototype model for the 2 tier of the Nigeria federacy.
The estimate for the 2017 fiscal year included N85.5bn for recurrent expenditure and N130.3bn for capital projects.
The first phase of the intra-city Kaduna light rail project will link Rigachikun with the refinery.
The government indicated that funds for the rail project would be sourced through a loan from the Central Bank of Nigeria.
The state government has also voted N2, 445,160,730.00 for the ongoing state trunk road project, while township road projects will gulp N7,705,788,694.58 in the fiscal year (Punch, 10/21/2016).
It is therefore instructive to note that with the rating so far, investors and creditors like the CBN etc will not have doubts whatsoever for the Value for the Money (VfM).
Kaduna is a microcosm of the needed Government by Objectives across Nigeria, it is therefore hoped that other states would follow this simplification of governance out from the realms of Rocket Science.

Gurgur Japheth MP is a Public Policy Analyst, writes from Gboko, Benue - Nigeria

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