Fitch Ratings has upgraded Nigerian Lagos State’s National Long-term rating to ‘AA+’ from ‘AA’.

The Outlook is Stable, it says.

The agency has simultaneously affirmed Lagos State’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ with Stable Outlooks and its Short-term foreign currency IDR at ‘B’.

Its NGN 275bn MTN programme, together with its NGN57.5bn and NGN80bn bonds, which mature in 2017 and 2019, respectively, have been affirmed at ‘BB-‘ and upgraded to ‘AA+’ from ‘AA’.

The upgrade reflects Fitch’s expectations of the state’s continued solid operating performance, improved transparency and efforts towards an increasingly sophisticated and transparent administration, which is conducive to growing private sector investments.

The rating action reflects the following rating drivers and their relative weights: High: Management and Administration: Fitch believes that Lagos management is becoming increasingly more sophisticated. With the aim to progressively improve transparency and accountability to international standards, the state is improving its governance and disclosure, with budgets and quarterly performance being published on the official website.

Debt management has also improved, with longer bond tenures and more loans from development banks while ministerial departments continue to bolster collections of local taxes.

With a local GDP accounting for 20%-25% of the national GDP, Lagos is a key driver of Nigeria’s economy despite being the smallest state.

Domestic production is fuelled by its diversified economy as a commercial hub in the country, with service, construction, transport and industry making up 80% of the local economy.

Fitch believes that Lagos’ socio-economic indicators will further improve as local GDP growth is expected to outperform the estimated national GDP growth of 7%-8% in 2014.

After recording a strong 57% in 2013, Fitch expects Lagos to see its operating margin stabilise at around 50% in the medium term, supported by growing local taxes, and by the administration’s commitment to keep cost growth in line with inflation.

Lagos’ revenue structure is highly diversified compared with the national average, amid continued efforts to expand revenue sources through oil-related projects.

Fitch expects Lagos’ revenue to remain driven by services and the tertiary sector.

Under its base case scenario, Fitch expects internal generated revenues (IGRs) to grow above NGN400bn by 2016, or 80% of total revenue, from about NGN266bn in 2013 (70%), reducing its dependence on federal allocation.

Fitch expects capital spending to remain at NGN250bn in 2014 as Lagos continues to invest in transport (including a light metro transit and a motorway under construction), water, health, education (child-care centres) and social protection.

In contrast to Lagos, Fitch affirms the Nigerian State of Rivers’ Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-‘ and its National Long-term rating at ‘AA-‘