Thursday, December 29, 2017 08.58PM / A BMI View
Ambitious Spending Plans Will Not Be Realised BMI View: The Nigerian government will fail to fully implement a planned expansionary budget for the second year running in 2017 as we expect that revenues will remain constrained by low oil prices while planned fundraising will fall short of its ambitious target. That said, we believe that Nigeria's low debt profile will continue to entice investors despite the country's current economic travails.
We see little prospect of the NGN6.7tn budget shown to parliament by President Muhammadu Buhari in October being realised in 2017, despite the deficit likely to remain quite wide, at 2.7% of GDP according to our forecasts. As such, the hoped-for boost to economic growth (both near- and long-term) will not be realised to the extent envisaged by the government. We project that real GDP growth will come in at 2.8% in 2017, with investment seeing real growth of just 3.0% – weighed down by ongoing weakness in private investment and the inability of the government to implement its own ambitious spending plans.
We forecast that government expenditure will reach just NGN5.0tn in 2017, a long way short of the government target, just as we expect that the planned expansionary budget of NGN6.1tn for 2016 will realise only NGN4.4tn of spending. Grand plans to invest in infrastructure and agribusiness have been curtailed by parliamentary delays to the budget, and by constraints on revenue collection. In the first half of 2016, government expenditure amounted to NGN2.5tn.
However, poor revenue collection on the back of pipeline outages caused by militant attacks in the Niger Delta – exacerbating the effect of lower oil prices – will have led to a further slowdown in spending in the second half.
We expect that these issues will continue to weigh on revenue collection in 2017, albeit to a lesser degree. BMI's Oil & Gas team forecasts that Brent crude will average USD55.0 per barrel (/bbl) in 2017, compared to a projected average of USD45.5/bbl in 2016, and we anticipate that production will see a mild increase from 1.7mn barrels per day (b/d) to 2.0mn b/d in 2017. This will contribute towards the budget deficit decreasing from a projected 3.0% of GDP in 2016 to 2.7% in 2017.
Nevertheless, this is still far from previous oil prices of USD99.5/ bbl seen, and production levels of 2.4mnb/d in 2014. As such, government efforts to boost spending will be constrained by what they are able to borrow.
Borrowing Plans Facing Headwinds
In October, the government announced plans to borrow as much as USD30.0bn (NGN9.4tn naira at current exchange rates) over a three-year period, a figure we see little scope of being realised.
Negotiations with multilateral bodies have been protracted as they have wanted to see greater exchange rate flexibility and continued tight monetary policy as a condition of their lending, and we believe that progress will remain slow.
According to finance minister Kemi Adeosun, discussions with the African Development Bank (AfDB) for a USD1.0bn budget support loan are further along than talks with the World Bank due to 'scheduling issues.' Other agencies being tapped for cash include the Islamic Development Bank, Japan International Cooperation Agency and China Eximbank.
Low Debt Profile Will Ensure Investor Interest
Despite Nigeria's economic contraction in 2016 and continued slow real GDP growth over the next several years, we believe that investors will remain positive towards Nigeria, and that it will easily raise money on international debt markets.
Nigeria's debt levels remain very low at under 15.0% of GDP, while external debt – which accounts for only 15.0% of the total debt stock – stood at just 2.2% of GDP in June.
Within this, around 80.0% of external debt is made up of concessional borrowing. Adeosun said in October that a mooted eurobond was still on schedule for issuance before the close of 2016.
We project that any new eurobonds from Nigeria will issue at around the 7.0% mark which Nigeria's existing 2021 and 2023 USD500mn eurobonds currently trade at.
Oil Market Outlook
BMI holds on to their current oil price outlook in the wake of the US election: We forecast an annual average price of USD55.0/bbl and USD53.5/bbl for Brent and WTI, respectively, in 2017. Gains are based on expected demand growth in emerging markets and continued pullback in non-OPEC supply, with the exception of the US. However, the downside risks to this forecast have materially increased following the election of Donald Trump. This is due to the potential for a stronger recovery in US shale, and weakened prospects for a coordinated OPEC cut on November 30. Trump has suggested supporting US oil production by relaxing industry regulations, including drilling restrictions.
BMI Research is a research firm that provides macroeconomic, industry and financial market analysis, covering 24 industries and 200 global markets.