Thursday, November 09, 2017 5:25 PM / Vetiva Research
On the 7th of November 2017, President Buhari presented the 2018 Budget of ₦8.6 trillion to the National assembly. A 16% increase on last year’s, the 2018 Budget pegs recurrent (Non-debt) expenditure at ₦3.5 trillion, capital expenditure at ₦2.6 trillion, and debt servicing at ₦2.0 trillion.
With 2018 Budget revenue estimated at ₦6.6 trillion – to be funded by oil revenues of ₦2.4 trillion and non-oil revenues of ₦4.2 trillion, the current administration is eyeing a deficit of ₦2.0 trillion, lower than in previous years (2017: ₦2.4 trillion; 2016: ₦2.2 trillion).
The 2018 Budget is based on an oil price assumption of $45/bbl, daily production of 2.3 million barrels, and an exchange rate of NGN305/USD, all in line with 2018-2020 Medium Term Expenditure Framework parameters.
The 2018 Budget is in line with the countercyclical fiscal stance of the present administration. Unsurprisingly, the same issues of revenue accrual, speed of budget passage, and skill in execution would determine the success of this year’s fiscal efforts. We expect the quality of budget implementation to be a key driver of macroeconomic performance in 2018, and emphasize the importance of capital expenditure and human capital investments in increasing Nigeria’s long-term productive capacity.
Budget parameters out of sync?
Budget parameters are also little changed from 2017, leaving them slightly out of sync with prevailing and prospective market realities. The oil price assumption of $45/bbl is conservative given recent trend (Brent crude currently around a 2-year high of $64/bbl) and expected to trend within the $50 - $60 range in the next year, supported by stronger global demand and expected producer action.
in 2016, arguably the trough of the oil price crash, prices averaged $43/bbl
(2015: $54/bbl), just below 2018 benchmark, indicating that the Federal
Government is effectively planning with a bear-case scenario. Should oil prices
come in above this level as expected, more funds should flow into the Excess
Crude Account (ECA), a less transparent vehicle.
Conversely, oil production estimates currently look optimistic. Nigeria last produced 2.3 mb/d in January 2014, and 2017 high is 2.1 mb/d in August. Moreover, a potential OPEC cap and a return to arms in the Niger Delta provide downside risks to 2018 target.
Finally, Federal Government currency expectation remains flat at NGN305/USD, the same as the official exchange rate and in line with Central Bank of Nigeria emphasis of no devaluation in the coming year. We expect buoyant oil earnings in 2018 – along with a more attractive macroeconomic environment – to support recent gains in the foreign exchange market.
Nevertheless, we highlight latent devaluation risk stemming from the c. 20% spread between fixed and floating market segments (as at the end of October), as well as higher global interest rates just when Nigeria looks to loosen monetary policy, which would discourage capital flows into the country.
ambitious non-oil revenue target?
Projected oil revenue is 15% higher than 2017 Budget estimate. We consider this a reasonable increase as oil revenue in 2017 has met the budget target and the outlook for oil earnings is moderately positive. Non-oil revenue estimates are however more ambitious and opaque. Corporate Income Tax, VAT, and Independent Revenues are little changed from the 2017 Budget, meaning that the 41% jump in projected non-oil revenues is driven by other expected funding sources.
For example, the FG expects ₦710 billion from the restructuring of government’s equity in Joint Venture arrangements and ₦512 billion from other recoveries. In total, the FG projects nearly ₦2 trillion in revenues from unconventional sources – a figure we consider overly ambitious given the tepid performance of all forms of non-oil revenues in recent years.
In our view, the base scenario would see unconventional non-oil revenues come in weaker than expected, hampered by challenges around the approval of FG asset sales and the ad hoc nature of recoveries. With these revenues accounting for 30% of the budgeted total, we highlight this as a key pressure point for budget funding.
FG eyes external debt market
In line with its stance of shifting from domestic debt to external debt, the Federal Government plans to source as much as half of its planned borrowings of ₦1.7 trillion from external sources, compared to a 54:46 split last year.
Given challenges with external borrowing in the last 18 months, particularly with securing legislative approval, we are cautious on the size of external debt that would be raised for the 2018 Budget and anticipate a greater proportion of domestic borrowing. Meanwhile, we see the recent Moody’s ratings downgrade and tightening monetary policy abroad putting upward pressure on the cost of external borrowing.
implementation critical to budget impact
Even as the FG has announced a third consecutive record budget, we note that the budget trend and composition is little changed from recent years and is in line with wider inflationary trend – 15.7% y/y increase in expenditure; 2017E average inflation: 16.5%. The proportion of capital expenditure and debt servicing to total spending are kept relatively stable at 28% (2017: 29%) and 23% (2017: 25%) respectively.
The overall effectiveness of spending would be determined by the efficiency of execution, as recent budgets have under-performed, primarily due to delays in passage and funding challenges. Though we are hopeful of expedient budget passage, considering the timing of the President’s Budget submission to the National Assembly, we maintain our conservative expectations of budget passage.