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HomeBusinessFitch Ratings downgrade Lagos to B- to mirror sovereign rating

Fitch Ratings downgrade Lagos to B- to mirror sovereign rating

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Fitch Ratings has downgraded Lagos State’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to ‘B-‘ from ‘B’ with Stable Outlook following the downgrade of the sovereign rating of Nigeria to ‘B-‘.

In a statement, the global rating agency said following the downgrade of Nigeria’s IDRs, we have taken similar rating action on Lagos to reflect the sovereign cap. Its Outlooks move in tandem with the sovereigns.

Fitch has revised Lagos’s Standalone Credit Profile (SCP) to ‘b+’ from ‘bb+’ due to the reassessment of the risk profile to ‘Vulnerable’.

As per Fitch’s rating criteria, Lagos’s IDRs are capped by the sovereign and its Outlooks reflect those on the sovereign. Fitch considers that the national government’s role remains predominant in Nigerian intergovernmental relations, as it controls the equalisation mechanism enacted through a system of transfers to states.

Therefore, rating action on the sovereign will be mirrored on Lagos, as its SCP is currently above that of the sovereign.

Fitch has reassessed the ‘Expenditure Sustainability’ Key Risk Factor to ‘Weaker’ from ‘Midrange’ due to the deteriorating operating environment, characterised by high inflation, which will weaken control of total expenditure growth.

According to Fitch’s International Local and Regional Government (LRG) Rating Criteria, Lagos’s Risk Profile has been reassessed at ‘Vulnerable’ due to the majority of ‘Weaker’ key rating factors in countries rated in the ‘B’ category or below.

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Lagos’s ‘Vulnerable’ risk profile reflects a very high risk that the state’s ability to cover debt service with its operating balance may weaken unexpectedly over our forecast horizon (2022-2026).

This may be due to lower-than-expected revenue, higher-than-expected expenditure, or an unexpected rise in liabilities or debt-service requirements.

Lagos is exposed to a deteriorating operating environment, which that weakens the state’s control over total expenditure growth, influenced by high inflation, rising commodity prices, and supply constraint amid naira depreciation.

Lagos has a wide set of responsibilities and high need for capital spending to maintain its attractiveness as Nigeria’s main economic hub, with demographic pressures on more services on infrastructure, health and education that limit the scope for cutbacks.

Under Fitch’s rating case, Lagos’s debt payback ratio (net Fitch-adjusted debt/operating balance) is around 4x in 2022-2026, which is consistent with a debt sustainability assessment in the ‘aaa’ category.

This is offset by weak debt service coverage (1.8x) and a fiscal debt burden rising towards 150 percent, which is high versus the peer group. This results in an overall debt sustainability assessment in the ‘aa’ category.

The combination of Lagos’s ‘Vulnerable’ risk profile and debt sustainability in the ‘aa’ category lead to a SCP of ‘b+’.

Fitch does not apply any asymmetric risk or extraordinary support from the central government. Lagos’s IDRs are capped at the sovereign level, as the federal government retains predominant influence over Nigerian inter-governmental relations and resource allocation to states.

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