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NSR Q4 2017 (3) - Fiscal: Federal Revenue Growth Shows Signs of Life

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Wednesday, October 11, 2017 04:18 PM / ARM Research  

 

Over the first five months of 2017, FG’s fiscal deficit printed at N1.828 trillion (or ~77% of projected fiscal deficit estimate for 2017), largely reflecting sizable revenue shortfalls on the oil and non-oil fronts. For context, actual federally retained revenues over the period was sizably lower than budget target (-55% at N1.015 trillion).

 

However, our analysis points to improved revenue picture in the subsequent two months. In arriving at this conclusion, we leverage on the seeming relationship between historical FAAC and gross federation account revenue, with the former having accounted for ~93% of the latter over the past 18 months. Using this relationship and other adjustments as a basis for estimation, we arrive at cumulative retained revenue of ~N1.51 trillion over the first seven months of 2017.

 

Whilst, like the case all though January-May, our estimated retained revenue remains sizably higher than in the corresponding period of 2016, it still lags government’s 2017 projections by a whopping 70%—with drivers of revenue weaknesses on both the oil and non-oil fronts already detailed out in our H2 17 strategy update.


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Despite the disappointing revenue picture, we believe FG’s expenditure remained at elevated levels going by budget implementation of 88% between January and May 2017. Thus, cautiously assuming same level of implementation for June and July, we estimate FG’s fiscal deficit of N2.65 trillion (or over 100% of FG’s target deficit for 2017).

 

Of this lot, cumulative FG foreign and domestic borrowings have, thus far in 2017, only covered 65% on a net basis—with borrowings from external sources accounting for 58% and domestic debt constituting the remainder. To this point, we note that FG’s debt-service to revenue ratio printed at 41% over H1 17 to further underpin FG’s gravitation towards cheaper external borrowings.

 

Improving oil revenue picture trims deficit forecast.

Going forward, we expect gross oil revenue to ride on both price and production momentum in the coming months. That said, we still view FG’s oil production target of 2.2mbpd and 2.3mbpd for 2017 and 2018 (vs. 1.83mbpd and 1.90mbpd in FY 17E and Q1 18E) as a tall target which would again see actual receipts lag projections. On the non-oil leg, we acknowledge potential pass-through from improved FX liquidity that could gradually cause import duties to track rising imports.

 

That said, with the level of import activities still expected to be sizably lower than in prior years, we see scope for only limited pass-through to non-oil revenue. In view of the mentioned, we project actual retained revenues to lag FG’s projection in the coming months with our base case scenario3 suggesting an implied fiscal deficit of N3.4 trillion in 2017E.


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From ARM’s H2 2017 Nigeria Strategy Report 

1.       NSR Q4 2017 (2) - GDP: Uphill with the Handbrake On

2.      NSR Q4 2017 - Crude Oil: Will Crude Oil ‘Roller Coaster’ Linger?

 

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