Fitch Ratings has revised the Outlook on Akwa Ibom (AK) state's Long-Term foreign and local currency ratings to Positive from Stable and affirmed the ratings at 'B+'. The rating agency has simultaneously affirmed the National Rating at 'AA-(NGA)', with Stable Outlook.

The Outlook revision reflects the subsiding restiveness in the Niger Delta region and buoyant market oil prices resulting in resilient oil-related revenues offsetting growing operating costs amid weak socio-economic indicators by international standards.

The ratings could be upgraded if budgetary performance remains strong, in line with Fitch's expectations and improving financial disclosure. Budgetary performances weakening beyond Fitch's expectations and/or a resurgence of local unrest undermining oil-revenue generation could lead to a revision of the Outlook to Stable or a downgrade.

AK continues to perform in line with Fitch's expectations with an operating balance of around NGN175bn, or about 75% of revenue. In Fitch's base case scenario, the operating margin should stabilise over the medium term, supported by resilient oil revenues and efforts to develop taxes while tackling operating cost pressures, and remain around NGN125bn, or 50% of the annual revenue, if prices were to fall towards USD50/pb.

Fitch expects oil-related revenues to continue to account for about 90% of AK's income. While this facilitates budgetary projections, AK remains vulnerable to swings in oil prices. The discontinuation of excess crude account (ECA) revenues, which averaged about 25% of income over 2008-11, is being offset by the partial removal of the subsidy on fuel import, which could account for up to NGN20bn. The stabilisation of oil extraction could translate into oil revenue of NGN230bn by 2014 from NGN200bn in 2011.

By increasing tax rates and land use charges and authenticating the tax payers' database, the administration expects to boost monthly local taxes to NGN2bn in 2012 from NGN1.2bn in 2011. Although the eventual re-direction of oil companies to pay taxes in AK instead of where they are officially headquartered may further boost revenues, Fitch expects growth to be more gradual with internally generated revenue (IGR) reaching NGN2bn a month by 2014, but not representing more than 10% of annual income.

The implementation of the national NGN18,000 monthly minimum wage will likely raise the wage bill to about NGN30bn in 2014, up 50% from 2011. Rising energy costs could lead to staff demanding higher salaries to tackle the growing cost of living. In Fitch's opinion, AK's operating costs are likely to continue to grow by about 50%, to NGN70bn over the medium term, driven by service delivery such as health and education.

The administration continues to prioritise projects that will foster social and economic growth and create job opportunities such as an international airport, entertainment centre, power projects and a refinery seaport. As investment remains largely calibrated to budgetary surpluses, Fitch expects capital spending to be around NGN200bn per annum over the medium term moderating the deficit before debt variation to 5%.

The bond financing of some capital projects is likely to raise debt to close to NGN120bn in Fitch's opinion, or 50% of recurrent revenue by 2014, up from NGN66bn in 2011. Nevertheless, debt and debt service coverage ratios should remain strong, below one year of the current balance and about 4x the operating balance, respectively.

Located in southern Nigeria, AK has a population of approximately 4.2 million inhabitants or about 3% of the national total. The state is one of the largest oil-producing states in Nigeria. It is less affected by unrest than its neighbouring states in the Niger Delta region, partly because its oil production is mainly located offshore.