By Ekpo Duke, Calabar
Fitch Ratings has assigned Cross River State a ‘B-‘ Long-Term Foreign- and Local-Currency Issuer Default Ratings ,IDRs, and a ‘AA-(nga)’ National Long-Term Rating with stable outlooks.
Cross River’s ‘B-‘ credit ratings reflect its dependency on revenue transfers from the federal government of Nigeria, despite improving internally generated revenue ,IGR. The state ‘b-‘ Standalone Credit Profile ,SCP, reflects manageable but rising debt, with some foreign-currency exposure, according to the global rating agency.
“We apply a notch of asymmetric risk to highlight below-standard disclosure on debt details, including interest payments”, the rating note explained.
Fitch said Cross River’s revenue structure is influenced by the state’s weak socioeconomic profile and reliance on transfers from the federal government, which can be volatile as they are dependent on hydrocarbons.
Like all Nigerian states, Cross River has broad responsibilities and high spending needs. To develop the local economy and increase IGR, Cross River targets significant investments in infrastructures, partly funded with debt.
Cross River’s revenue robustness is influenced by its overall weak socio-economic profile and reliance on volatile transfers from the federal government.
About 75% of Cross River’s revenue is made up of federal allocated revenue, VAT and statutory transfers the latter over half of operating revenue- that are highly dependent on the sale of hydrocarbons.
The state’s IGR is about 20% of total operating revenue, which is below the Nigerian states average, although Cross River has made some progress, as evidenced by a 11% average IGR increase in the last five years and 50% year on year in 2023.
Cross River’s revenue potential depends on its ability to broaden its tax base and enforce tax compliance. The main fiscal revenue is pay-as-you-earn taxes, on which Cross River cannot set the tax rate.
Other IGR sources, including fees, tend to be irregular but Fitch considers they have upside potential, as demonstrated by 2023’s 86% increase compared with 2022. Fitch views the ability to expand the tax base as challenged by Cross River’s large informal economy, which is widely based on agricultural activities, and the low income of its population.
The state has a broad set of responsibilities and large spending needs to support the local economy, according to Fitch Ratings.
Analysts said spending responsibilities range from social sector (over 25% of total expenditure, including education and healthcare) and economic development (about a quarter).
Cross River is exposed to a deteriorating operating environment, which weakens the state’s control over total expenditure growth, and is influenced by high inflation, rising commodity prices, and supply constraint amid naira depreciation.
Fitch’s rating case of a prolonged economic downturn expects spending growth to outpace revenue growth in the medium term, driven by increasing staff costs and high inflation on purchased goods.
The central government has no mandatory balanced budget rules for states, which are required to keep their deficits at no more than 3% of national GDP. Fitch views Cross River’s cost structure as very rigid, with staff-related payments making up about half of its operating expenses.
Cross River has a very ambitious capex plan to boost its infrastructures and aims to build a new airport. It also has plans to improve energy facilities and to develop information technology to support a more favourable environment to attract business.
A high share of capex in total expenditure but low budget realisation capacity could curb the state’s NGN0.6 trillion investment plan for 2024-2025. The national framework for debt is evolving and borrowing limits are quite wide. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure.
Cross River’s debt is made up of domestic debt with local counterparties and several facilities sponsored by the federal government , which is 31% of adjusted debt.
“We include contractors and pensions arrears (18%) in our calculation of adjusted debt. Cross River’s external debt (50% of adjusted debt) almost doubled in 2023 compared with 2022 due to the steep depreciation of the naira across 2023”.
External and intergovernmental debt is largely serviced by deductions from statutory allocation, according to the rating note.
Fitch deems Cross River’s liquidity as weak as the state has no committed liquidity lines and domestic banks rated in the ‘B’ category tend to extend credit lines either with short maturities, or with backup from the federal government through direct deductions from statutory allocations for longer maturities. Cross River’s cash position has been volatile in the last five years. Emergency liquidity could come directly from the federal government, helping states meet liquidity shortfalls and fund payments of salaries and pensions.
Analysts noted that Cross River’s fiscal performance improved in 2023, backed by increasing VAT and statutory allocation. Cross River’s operating margin ranges from 40% to 65%, supported by federal transfers and a moderate increase in IGR in the last three years.
“In our rating scenario, oil prices and naira depreciation will support Cross River’s revenue in the short term, but a medium-term reduction of oil prices below USD50 per barrel would shrink the state’s operating balance to below 30%, if not offset by higher IGR and VAT”, Fitch said.
Analysts expect Cross River’s net Fitch-adjusted debt to significantly increase to around N880 billion in its rating case of lower oil-related transfers. The increased debt includes the depreciation of Cross River’s FX debt, and Fitch’s assumption of new borrowings to fund the state’s ambitious N0.6 trillion capital expenditure plan in the next five years.
