Thursday,
November 16, 2017 9:55 AM /PwC
Budget proposal reaches record high
The
Federal Government of Nigeria (FGN) has announced a 2018 budget proposal which
will put spending at a record high of NGN8.6 trillion. According to the budget
speech, the aim is to consolidate on the improvement in economic growth in 2017
by sustaining the reflationary policies of the past two budgets. The budget
assumes an oil price benchmark of USD45/bbl, oil production of 2.3 million
barrels per day, and an exchange rate of NGN305/USD.
The
budget is to be funded with revenues projected at NGN6.6 trillion (+30.1% y/y),
with oil and non-oil accounting for 37.0% and 63.0% respectively. Given the
delays in legislative approval of the 2017 budget, we expect that the
operational period for its appropriation will be extended to 2018. This
suggests that the implementation of the 2018 budget could be delayed, perhaps
into Q2’18.
Underperforming non-oil revenues could result in higher fiscal
deficit
The
2018 budget proposes an aggressive increase in non-oil revenues to NGN4.2
trillion. Relative to the 2017 budget, the target is 44.6% higher; this
variance could be close to 100% when compared to our estimate of the actual
non-oil revenue collected in 2017. Whilst the reduced reliance on oil revenues
is plausible, the trend and reasons for revenue underperformance in prior years
suggest that this target might be difficult to achieve.
Nigeria’s
low tax to GDP ratio at around 6% is a consequence of a poor and inefficient
tax collection system. While the government has implemented specific measures
to address this by expanding the tax base and increasing tax compliance using
various incentives, the impact is yet to materialize. As a result, we estimate
that the fiscal deficit could overshoot projections by as much as 67.7% to
NGN3.4 trillion.
Increasing debt portends debt sustainability risks
The
FG’s budget estimates the 2018 deficit at NGN 2.0 trillion. Given our outlook
of revenue underperformance, we expect a higher-than-expected deficit, which
could bring the FG’s debt stock to NGN20.9 trillion in 2018 (2017E: NGN17.6
trillion). We believe the
FGN would rely more on the domestic debt market to finance this deficit, given
the availability of a stable domestic investor base, which includes the Pension
Funds.
Moreover,
external financing could be tight in 2018 due to the uptrend in interest rates
in advanced economies, particularly in the US and UK. Following this, we
estimate that debt to GDP could rise marginally to 15.1% (2017E: 14.6%). This
is closer to Nigeria’s country-specific threshold of 19.4%, but still far below
the IMF’s recommended threshold of 56%.
Although
the low debt-to-GDP ratio is reassuring, the debt service to revenue ratio
which is often cited as a better measure of debt sustainability is projected at
30.1% in 2018 (threshold: 28%). Based on our estimates, this could rise to
45.9% in the event the budget deficit reaches 2.4% of GDP.
Inflationary risks subdue scope for monetary easing
Given
a reduction in core inflation to 12.1% y/y in September 2017, and our
expectation of a continued moderation in inflation in the near term, we believe
there is sufficient head-room for a rate cut in Q1’18. However, this
reflationary budget which provides for a 12.0% increase in personnel costs
raises inflation expectations.
Likewise,
history suggests that the commencement of the election cycle ahead of the 2019
general elections could portend significant inflationary risks, thus reducing
the scope for monetary easing.
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