Wednesday, March 28, 2018 /10:10 AM / BMI Research
BMI View: Nigeria's tax base will remain dangerously dependent on oil revenues given the lack of private sector enthusiasm for the government's efforts to diversify into new sectors. However, the ongoing recovery in oil prices and the government's tendency towards relatively modest spending will help limit the size of budget deficits going forward, keeping the public debt burden sustainable.
Government Debt: Despite weak growth and a severe decline in government revenues alongside the collapse in oil prices between 2014 and 2016, Nigeria's public debt burden remains one of the most affordable in Sub-Saharan Africa and will continue to be so over the next decade according to our forecasts. We believe relatively small deficits and a low base will see total government debt average just 19.0% of GDP over the next 10 years in Nigeria, compared to a regional average of 51.3% during this period. Furthermore, as of Q317, 61.3% of total government debt (Federal and State) was held domestically, mitigating some of the impact posed by currency risk.
The cost of servicing domestic debt has increased over recent months in response to tighter monetary policy and the modest increase in the budget deficit since 2014. While this has seen interest payments on government obligations account for a higher proportion of public revenue (particularly over 2018 when short-term notes will mature), we do not believe this marks a structural shift in Nigeria's fiscal position or any meaningful risk to sustainability.
Budget Balance: Despite the government's best efforts to promote revenue diversification, Nigeria's hydrocarbons industry will likely continue to dominate the country's fiscal picture. As it stands, our Oil & Gas team see crude production gradually falling over the next decade by an average rate of -0.4% per annum, meaning that as oil prices begin to plateau around USD80.0 per barrel in the second half of our long-term outlook period to 2027, revenues from the sector look set to stagnate. We see the long-term risks to oil revenues as likely skewed to the upside, given the slow improvements being made to the regulatory environment. In January 2018, Nigeria's parliament passed the Petroleum Industry Governance Bill (PIGB), the first piece of legislation in series of planned oil industry reforms making their way through parliament.
While the successful signing of the PIGB is unlikely to spark any sudden uptick in growth in the sector, reforming regulation is an important step in attractive greater volumes of foreign investment. If the government continues to make progress in this regard, and is able to move forward with similar regulation governing local content requirements and fiscal arrangements, we could see production growth remain in positive territory, supporting public revenues going forward.
That being said, dependence on the oil sector will leave the treasury's accounts vulnerable to swings in commodity prices – as see between 2014 and 2016, when government revenues fell by 45.8% – and progress with developing alternative sources of revenue will likely prove slow. Other sectors often touted by Sub-Saharan governments pushing for reform, such as manufacturing and agriculture, require substantial investment into the infrastructure that would make them regionally or globally competitive. In Nigeria, estimates for how much money is needed to adequately finance the required infrastructure development go as high as USD3trn over the next 30 years.
Finding the private sector investment needed to meet this figure will prove difficult given the unattractive regulatory environment hindering many industries in Nigeria. Meanwhile, we see little scope for the government's to fund more of the development itself, given the large portion of government spending that goes toward recurrent expenditure, particularly public sector salaries. This underpins our view that significant structural reform is likely off the cards over the coming years, undercutting long-term growth and government revenues.