Fitch Revises Lagos’s Economic Outlook to Negative on Sovereign Rating Action

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Fitch Ratings has revised Lagos State’s Outlooks to Negative from Stable, while affirming the state’s Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘B+’.

Under EU credit rating agency (CRA) regulation, the publication of International Public Finance reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status.

Following the recent Outlook revision on Nigeria’s Outlooks on its IDRs (see Fitch Revises Outlook on Nigeria to Negative; Affirms at ‘B+’ dated 19 December 2019 on www.fitchratings.com) we have taken similar rating action on Lagos as its ratings are capped by the sovereign and its Outlooks move in tandem with the sovereign’s.
The next scheduled review date for Lagos is 27 March 2020.

Key Rating Drivers
The Outlook revision reflects the following key rating drivers:
The Outlook of Lagos reflects that of the Federal Government of Nigeria, while its IDRs are capped by the sovereign’s. Lagos’s standalone credit profile (SCP) is assessed at ‘bb+’, reflecting the state’s weak risk profile by international standards against Fitch’s expectations of sound debt sustainability assessment. Fitch projects that Lagos will report budgetary performance and debt metrics that are commensurate with its current ratings.
The rating drivers of the Long- and Short-Term Foreign-Currency IDRs are unaffected, leading to their affirmation.
We previously reviewed Lagos’s IDRs on 29 November 2019. The credit analysis on Lagos State is available at www.fitchratings.com.

Key Assumptions
Qualitative assumptions and assessments and their respective weight in the rating decision:
Risk Profile: Weaker/low weight
Revenue Robustness: Midrange/low weight
Revenue Adjustability: Weaker/low weight
Expenditure Sustainability: Midrange/low weight
Expenditure Adjustability: Midrange/low weight
Liabilities and Liquidity Robustness: Weaker/low weight
Liabilities and Liquidity Flexibility: Weaker/low weight
Debt sustainability: ‘aa’ category/low weight
Support: N/A
Asymmetric Risk: N/A
Sovereign Cap: Negative / high weight
Fitch’s rating case is a “through-the-cycle” scenario, which incorporates a combination of revenue, cost and financial risk stresses. It is based on 2014-2018 figures and 2019-2023 projected ratios.
Quantitative assumptions – sovereign-related (note that no weights are included as none of these assumptions were material to the rating action)
Figures as per Fitch’s sovereign actual for 2018 and forecast for 2021, respectively:
GDP per capita (US dollar, market exchange rate): 1,820.9 and 2,241
Real GDP growth (%):1.9 and 2.5
Consumer prices (annual average % change): 12.1 and 12.5
General government balance (% of GDP): -4.0 and -4.7
General government debt (% of GDP): 24.9 and 30.4
Current account balance plus net foreign direct investments (% of GDP): 2.7 and -0.1
Net external debt (% of GDP): 0.1 and 0.7
IMF Development Classification: EM (emerging market)
CDS Market-Implied Rating: N/A
Rating Sensitivities
The IDRs of Lagos are constrained by the sovereign. Any rating action on the sovereign’s ratings will be mirrored on Lagos’ ratings.
ESG Considerations
ESG credit relevance is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg.
Committee Minute Summary
Committee date: 9 January 2020
There was an appropriate quorum at the committee and the members confirmed that they were free from recusal. It was agreed that the data was sufficiently robust relative to its materiality. During the committee no material issues were raised that were not in the original committee package.
The main rating factors under the relevant criteria were discussed by the committee members. The rating decision as discussed in this rating action commentary reflects the committee discussion.

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