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Thursday, April 09, 2020 / 11:55 AM
/ By NOVA Merchant Bank / Header Image Credit: @novabankng
In our recent assessment of the revised budget
benchmark oil price and cut to expenditure by the Minister of Finance
(Published 27 March, see report: Fiscal Position Getting Critical), we
concluded that for the FG to finance a large chunk of the deficit and implement
required stimulus, a massive bailout funds from both IMF and the World Bank
will be required. Also, while noting the crowding out effect of such actions,
we stated that more aggressive borrowing from the domestic economy cannot also
be ruled out. Our view was anchored on the fact that, irrespective of the size
of the deficit (occasioned by lower revenue), it is not a good time to cut
expenditure especially when recurrent expenditure is sticky downwards and
unfolding events require much more sizeable stimulus than that offered by the
CBN in the event of an escalation.
Largely in line with our view, the Finance Minister in
a press briefing on Monday unveiled the budget augmentation borrowing of $6.9
billion. Breakdown revealed the Federal Government is willing to borrow a total
of $3.4 billion from the IMF (under the Rapid Financing Instrument), $2.5
billion from the World Bank and $1 billion from the AfDB. According to the IMF,
the fund will be deployed for the country to address urgent balance of payments
needs and support policies that would make it possible to direct funds for
priority health expenditures and protect the most vulnerable people and firms.
Also, the Debt Management Office (DMO) is seeking
approval to raise the N850 Billion approved as external borrowing in the budget
from the domestic market. To provide immediate support to states, the
government plans to withdraw $150 million from Nigeria Sovereign Investment
Authority ('NSIA') Stabilization Fund to support the June 2020 Federation
Account Allocation Committee (FAAC) disbursement. Also, to support the cash
flow of state governments, debt and interest Moratorium for States FGN and
CBN-funded loans is to be effected.
According, to the Minister, the measures (higher
borrowings, moratorium on loans and drawdown from the NSIA) are necessary given
the shortfall in revenue, especially oil. Based on the Appropriation Act,
monthly FAAC disbursements to the Federal and State Governments were projected
at N888.5 billion, but is has declined to N716.3 billion in January and N647.4
billion in February. The Ministry estimates it could decline further below N400
billion (over the next 3 to 6 months), which is lower than average of at least
N650 billion necessary for the Federal and State Governments to meet their
current obligations.
On the FGN planned domestic borrowing, compared to
total bond sale of N683 billion and N640 billion (offered amounts of N450
billion and N340 billion) respectively in Q4 19 and Q1 20, the FG plans to step
up its auction. The recently released Q2 bond auction calendar suggest a
planned borrowing of N745 billion. The DMO stated that if approval is granted
to issue the previously planned external borrowings locally, the Q2 2019 bond
issuance calendar might change.
By our estimate, the planned borrowing of $6.9 billion
and the drawdown from NSIA will unlock about N2.7 trillion for the federation,
which is in line with our expected shortfall from both oil revenue, lower
customs and VAT revenue.
Using the revised budget benchmark price of $30/barrel
and crude oil production of 1.7mbpd, the expected oil revenue to the federation
account and FGN will decline by N2.5 trillion and N1.6 trillion respectively on
our estimate. Adjusting our expected deficit for the planned foreign
borrowings, we still see a gap of N2.2 trillion. Going by the trend in Q1 2020
wherein the FG sold a total of N640 billion at bond auctions, we believe the
domestic market is still sufficient to cover the gap. In our view, while we see
the necessity for capex spending and the fact that the additional funding can
conveniently cover the planned 2020 capex spending, we believe current scenario
could shift focus from actual capex spending.
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