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Budget 2018: Still a Long Stretch

Budget and Plans	4013 VIEWS
Budget and Plans
4013 VIEWS

Wednesday, December 06, 2017 / 9:55 AM /ARM Research

President Buhari presented the proposed federal budget for 2018 tagged “the Budget of Consolidation” to the National assembly with FGN proposing a 15.7% YoY expansion in aggregate expenditure to N8.61 trillion splits into: non-debt recurrent expenditure of N3.5 trillion (+32% YoY), capital expenditure of N2.4 trillion (+11.7% YoY), debt service of N2 trillion (+21% YoY) and statutory transfers of N457 billion (+5.1% YoY).

To implement the proposed 2018 fiscal outlay, the FGN projects retained revenues of N6.6 trillion (+30% YoY) largely underpinned by higher oil receipts (+15% YoY to N2.4 trillion) and a 40% YoY jump in non-oil revenues to N4.2 trillion. On non-oil, while the 2018 budget assumes higher estimates for Independent and other revenues (+80% YoY to N2.84 trillion), it projects a 3% slide in non-oil receipts to N1.33 trillion.

Consequently, fiscal deficit is expected to print at N2.01 trillion, albeit lower YoY by 14.5%. In terms of deficit financing, the FG plans to raise N306 billion from sale of non-oil assets with a tilt towards higher external borrowing (50% apiece for domestic and external borrowing) which implies borrowing of $2.8 billion offshore in 2018.

On oil assumptions, while assumption for crude oil price is roughly consistent in the near term, the pitfall remains FG’s overly optimistic stance on crude oil production which is 15% higher than our forecast and guides to an overly optimistic projection for oil revenue. Elsewhere, we are of the view that FG’s projection for non-oil revenue is overly ambitious.

For context, government could only achieve about 51% of budgeted non-oil revenue in H1 17 on a prorated basis. While we believe that improved FX liquidity should provide support for imports and custom revenues, we note that imports activities still significantly lag 2014 and 2015 levels.

Consequently, despite the FG plans to raise the VAT rate for luxury items from 5% to 15% from 2018, we think non-oil revenue will be shy from projections with 2018 fiscal deficit expected to come in higher than FG’s projections.

Overall, as in the 2017 budget, we see enough downside across both revenue segments and therefore remain unconvinced of FGN’s estimates. We have assumed budget implementation of 90%.

Overall, we project fiscal deficit at N2.7 trillion - 41% greater than government projection. Thus, we see scope for elevated borrowing though tilting towards external sources.

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