Fitch Affirms Cross River State at ‘B’; Outlook Stable
Fitch Ratings has affirmed Cross River State’s Long-Term Issuer Default Rating (IDR) at ‘B’ with a stable outlook. In the rating note, Fitch said the affirmation considers improvements in Cross River’s financial profile, which are reflected in an upward revision of its Standalone Credit Profile (SCP).
“We also removed the asymmetric risk to reflect improvements of interest payment disclosure in 2024 financial statements, while intergovernmental loans, which we consider to be junior to market and multilateral debt, is neutral to its ratings”.
Fitch explained that Cross River’s Long-Term IDRs are aligned with Nigeria’s. Ratings analysts revised Cross Rivers’ standalone credit profit to ‘b’, from ‘b-‘, reflecting its improved financial profile to ‘a’, following deleveraging with high transfers from the federal government.
The State’s standalone credit profile also considers peer comparisons with other local and regional governments (LRGs), in particular Nigerian states.
According to Fitch, 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 depend on hydrocarbons.
Like all Nigerian states, Cross River has broad duties and high spending needs, and it is sensitive to its weak operating environment. The state’s weak socioeconomic profile and reliance on federal government transfers, which can be erratic, affect its revenue robustness.
The rating note highlighted that over 70% of revenue comprises federal allocated revenue, i.e., VAT and statutory transfers that depend on the sale of hydrocarbons.
In 2024, internally generated revenue (IGR) rose by about 50% compared with 2023, and by 92% over the last five years from a low base, due to improving collection and higher pay-as-you-earn income tax, following an increase in the minimum wage.
However, IGR remains below their potential, the rating note added. Cross River’s revenue potential depends on its ability to broaden its tax base and enforce compliance, Fitch said.
The state’s large informal economy, which depends heavily on agriculture, and the low income of its population limit its ability to expand the tax base.
The main fiscal revenue is pay-as-you-earn taxes, on which Cross River cannot set the rate. Other IGR sources, including fees, tend to be irregular, although they have the potential to increase, as demonstrated by a cumulative 244% rise over the last two years.
However, this would cover less than 50% of a reasonably expected decline of revenue in an economic downturn, the rating note stated..
Cross River is exposed to a deteriorating operating environment, which weakens spending control, and is influenced by high inflation, rising commodity prices and supply constraints amid naira depreciation.
The state has many responsibilities with large spending needs to support the local economy. Spending includes the social sector (including education and healthcare) and economic development.
Under Fitch’s rating case of a prolonged economic downturn, analysts expect spending increases to outpace revenue growth over the medium term, driven by rising 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.
Cross River’s cost structure is rigid, with staff-related payments amounting to about half of its operating expenses (opex).
The state’s capital expenses (Capex) has a high share of total expenses, but the state’s limited capacity to implement them could curb its ambitious investment plan for 2025-2027, which includes boosting infrastructure with an airport and deep seaport, improving energy facilities and developing information technology to attract business.
The national debt framework is evolving, and borrowing limits are wide. Nigerian states have no restrictions on debt maturities, interest rates or currency exposure.
Cross River’s debt comprises domestic debt with local counterparties and several facilities sponsored by the federal government. Overall, domestic debt fell 19% year on year in 2024. Ratings analysts include contractors and pensions arrears (6%) in Fitch calculation of adjusted debt.
A 63% increase in Cross River’s external debt in 2024 reflects the effects of naira depreciation since FX liberalisation in 2023. Its external and intergovernmental debt is largely serviced by deductions from statutory allocations.
Cross River’s liquidity is 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 back-up from the federal government through direct deductions from statutory allocations for longer maturities.
The state’s cash position has been volatile over the past five years, but more than tripled in 2024, bolstered by transfers. The federal government can provide direct emergency liquidity, helping states meet liquidity shortfalls and fund payments of salaries and pensions. Renaissance Energy Upgrades Rivers Technical College with $3m– GM
