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Nigerian Fiscal: Déjà Vu All Over Again?

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In first half of 2018 strategy report, ARM Research estimated fiscal deficit over 2018 to print at N2.9 trillion – from the revenue expectation of N4.4 trillion and expenditure of N7.3 trillion – which basically formed the domestic borrowing expectation of N1.7 trillion over 2018.

Precisely, Federal Government’s receipts of N561.7 billion over the first two months stemmed from higher oil prices and crude production while expenditure over the same period printed at N1.1 trillion. In terms of domestic borrowing over the period, Federal Government net issued N122.7 billion and N109.6 billion in January and February respectively which combined sums up to N232 billion – 45.5% of actual fiscal deficit – implying that Federal Government must have sourced funding from alternative sources to meet the balance of N278 billion.

Perusing through the financial statement of the Apex bank revealed an increase in Central Bank of Nigeria claims on the federal government to the tune of N715 billion over the two months period in 2018 wherein the Federal Government must have drawn down on to fund the shortfall between fiscal deficit and domestic borrowing.

Over 2018, ARM Research expects higher crude oil prices and production to bolster oil receipts and, by extension, Federal Government retained revenue. With a budget implementation of 75%, it is expected that fiscal deficit to print at N1.78 billion over the year. In terms of financing, on the sale & privatization of government assets where Federal Government expects N311 billion, ARM Research forecast receipt of 50% of the expected proceeds.

On foreign borrowing, ARM Research expects the FG to issue $2.8 billion (N850 billion) in Eurobonds over the second half of the year. With regard the balance of N775 billion which should ordinarily be financed through domestic borrowing, it is assumed that 50% part funding by the CBN which suggests that the government could possibly net issue ~N388 billion over 2018 under the base scenario.

Budget outlay revised to match higher revenue

After six months of face-off, the legislative arm finally passed the 2018 budget in May with the President assenting the appropriation bill in June 2018. Expectedly, the approved bill came with adjustments. First-off, relative to proposed receipts, aggregate revenue was up N559 billion to N7.17 trillion, following an upward revision to oil revenue estimate (N546 billion to N2.99 trillion) reflecting an upward revision in crude oil price assumption to $51/bbl. (prior: $45/bbl.), while keeping other oil variables unchanged.

The adjustment to crude oil prices was in line with current realities, as crude oil prices averaged $71/bbl. over first half in 2018 (+25%). On non-oil revenue, receipts from Company Income Tax (CIT) was revised lower to N658 billion (- N136 billion) while under ‘other revenue’, a new revenue source – FAAC levies – was introduced with planned receipts of N146 billion over 2018. Overall, approved aggregate non-oil revenue printed at N4.17 trillion, unchanged from what was proposed.

Largely reflecting the increase to Federal Government revenue, aggregate expenditure was revised upward by N508 billion to N9.12 trillion with much of the increase allocated to capital expenditure (+N445 billion to N2.88 trillion), accounting for 31.5% of total Federal Government expenditure (2017: N2.17 trillion). Also, statutory transfers increased N73 billion to N530 billion with the increase most likely allocated to NDDC and UBEC.

Overall, with the foregoing showing higher reviews to revenue than expenditure, fiscal deficit printed at N1.95 trillion, lower than N2.01 trillion earlier proposed. To finance the deficit, the government plans to generate N311 billion – split into N306 billion from privatization of government assets, and N5 billion from sale of other government property. The balance of N1.64 trillion would be financed by borrowings, split into domestic (N793 billion) and foreign (N849 billion) borrowings.

Higher oil prices underpin improved Federal Government receipts

Over the first two months of 2018, the federal government fiscal deficit printed at N510 billion (split into N288.9 billion in January and N221.7 billion in February) due to higher government outlay which exceeded Federal Government receipts over the same period. Starting off with receipts, Federal Government collected N561.7 billion, representing a decline of 45.2% YoY due to the bloated base of the same period in 2017 from one-off receipts.

Excluding the one-time revenue translates to a 61.8% YoY increase in actual receipts. While the breakdown of two months of 2018 revenue into oil and non-oil receipts wasn’t provided, ARM Research estimated value of oil receipts suggests that the sub-component was the key driver of receipts.

According to our estimate, Federal Government’s share of oil receipts printed at N323.9 billion – 58% of total receipts, supported by higher crude oil price and production. Elsewhere, non-oil receipts of N237.8 billion (+3.4% YoY) was supported by higher tax collection following improved economic activities and widening of the tax base.

Having said the above, ARM Research highlights that Federal Government’s actual receipts in two months of 2018 was 53% short of budgeted revenue (N1.19 trillion) over the two-month period, largely due to non-oil receipts which had a shortfall of 65.8%.

On expenditure, outflow over the review period printed at N1.1 trillion with recurrent expenditure (N830 billion) accounting for 77% of total spend while the balance was disbursed to meet capital expenditure (N242.2 billion) – which was utilized on 2017 capital projects considering that 2018 capital spend commenced after the assent of the 2018 bill.

Relative to pro-rated two months of 2018 budget, actual recurrent expenditure suggests that Federal Government achieved 90% of its recurrent budget, reflecting its obligation to meet personnel, overhead and debt service spend, as well as the fact that spending on recurrent starts from the beginning of the fiscal year irrespective of when the budget is passed. Accordingly, budget implementation in the two-month period printed at 70.5% (vs. 89.6% in 2-Month in 2017).

History seems to be repeating itself

Despite fiscal deficit of N510 billion, Federal Government net issued N122.7 billion and N109.6 billion in January and February respectively which combined sums up to N232 billion, 45.5% of deficit. This therefore suggests that Federal Government sourced funding from alternative sources to meet the balance of N278 billion (54.6% of fiscal deficit), considering that the proceeds from the $2.5 billion Eurobond in February 2018 were earmarked to meet maturing Treasury Bills and thus, do not think it was used to finance the fiscal deficit.

Perusing through the financial statement of the Apex bank revealed a resumption of funding by the CBN to Federal Government. Interestingly, there was an increase in CBN’s claims on Federal Government from Jan 2018, with month on month increase of N318.8 billion and N396.5 billion in the first two months of 2018, suggesting CBN helped plug the Federal Government deficit.

Momentary respite but headache persists

Over the first four months of 2018, FAAC allocation to state governments expanded 42% YoY to N698.7 billion, reflecting higher oil receipts and increased VAT allocation (+17% YoY). Although, the sturdy growth suggests an improved revenue for states, ARM Research notes that on an annualized basis, actual allocation to states accounted for only 23% of cumulative state government budget for 2018 (vs. 22% in the prior year).

The dismal receipt-budget picture as well as most states inability to generate sufficient internally generated revenue has left the federating units in a dire condition of constantly failing to meet their obligations including the payment of workers’ salaries.

FG finances in better shape on higher oil prices

Over the rest of 2018, ARM Research expects Federal Government’s receipts to remain robust with much of the support coming from the oil segment. On oil, ARM Research expects oil prices to remain stable at an average of $72.5/bbl. over H2 18 – which is significantly higher than the budget oil price benchmark of $51/bbl. The foregoing alongside the expectation of 2.0mbpd oil output (budget: 2.3mbpd) and exchange rate of N305/$, translates to oil receipts of N2.9 trillion, at par with the budget.

On non-oil receipts, ARM Research believes that revenue from this segment will grossly underperform budget due to ambitious targets set by the Federal Government. Specifically, ARM Research are pessimistic on proposed revenue of N710 billion from the restructuring of JV oil assets and N512 billion from recoveries with the former highly unlikely given the absence of moves by the Federal Government with regard commencement of the process towards the reduction of its stake in JV assets.

On other nonoil receipts, ARM Research have varied expectation. They are positive on improved custom receipts due to the recent upsurge in excise duty rates on alcohol & tobacco and Federal Government’s improved ability to collect custom taxes. Overall, we have raised our non-oil estimate by 10% to N2.2 trillion. Combined with oil receipts, ARM Research estimates federally collected revenue to print at N5.08 trillion for 2018 (32% lower than budget projections). Assuming 75% budget implementation (100% recurrent & 40% Capex – Jun to Dec 18), ARM Research expects fiscal deficit to print at N1.78 trillion.

CBN backdoor financing guides to muted local borrowing over 2018

Regarding funding sources, as stated earlier, Federal Government plans to raise N311 billion from the privatization and sale of some non-oil assets. However, considering the bureaucracy and political drags, it is anticipated that 50% of the non-oil asset sale proceeds under the base case scenario in 2018. Federal Government also plans to seek external funding of $2.8 billion via Eurobonds (N850billion) over the second half of 2018 which would be successful considering that Federal Government’s Eurobond sale of $2.5 billion earlier in the year was oversubscribed with a bid-cover size of 1.4x.

The balance of N775 billion, using the estimated fiscal deficit, should ordinarily be financed through domestic borrowing. However, it is believed that part of the deficit would be financed by the CBN considering the increase in CBN’s claims on Federal Government over Q1 18 to the tune of N715 billion, after five months of repayment on the part of Federal Government. Also, in recent times, government’s keen drive to reduce its debt burden and debt service cost explains its aversion towards increasing its supply of paper.

Assuming 50% part funding suggests that the government could possibly net issue ~N388 billion over 2018 under the base scenario. Additionally, ARM Research played out different scenarios in the table below to forecast the potential size of domestic paper issue using the estimated fiscal deficit (N1.78 trillion) for 2018.

It is estimated that to finance the budget, the net debt issue could range between N311billion and N737 billion with the range sizably lower than 2017 net issuance of N1.27 trillion. In sum, the scenario analysis guides to muted domestic borrowings in 2018.

– ARM Research

 

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Nigeria

Nigeria’s economy to experience higher growth if liquidity can be unlocked

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“Unlocking Liquidity will restore growth and stability for Nigeria,” Ayo Teriba, Economist and CEO, Economic Associates.

If Nigeria is to achieve sustainable economic growth and stability in its economy, unlocking liquidity must be given top priority.

Dr. Ayo Teriba, an economist and CEO, Economic Associates, made explained this point at the Q2, 2019 one-day quarterly conference on Nigeria’s economic outlook in Lagos.

He decried the fact that Nigeria was at the low end of the liquidity ladder in Africa, arguing that the situation had to be addressed urgently.

Liquidity he pointed out was critical to increasing the nation’s external reserves that serve as a buffer against shocks in commodity prices.

One of the ways he believed Nigeria could improve its liquidity, is by attracting capital inflows, which was important considering the revenue challenges of the government.

In the evolving race for global liquidity, Teriba made a strong case for the alignment of policies to strengthen liquidity.

According to him, “The Federal Government is focused on growth, while the Central Bank of Nigeria is concerned about stability. There is no express concern about liquidity”.

He was of the view that liquid markets are about making sure that there are buffers against shocks, and for Nigeria, having more capital inflows was important than outflows.

Speaking further Teriba identified the various options for unlocking liquidity in the economy, which include;

Privatization: Which implies partially selling its equity across all State-Owned Enterprises, SOEs to retain a minority stake. (Brownfield Foreign Direct Investment Inflow)

Liberalization: This implies the development of idle land and building and unbundled infrastructure projects. (Greenfield Foreign Direct Investment Inflow).

Commercialization: Getting rental income from wholesale leasing of idle lands and buildings.

Securitization: This suggests securitization of future income streams from all financial and non-financial assets.

Teriba called for a strategic reform of revenue generation in the federation and across all tiers of government.

The economist stressed the need for Nigeria to move beyond exports, taxes and debts towards rental income and equity. He stressed that Nigeria had a lot to gain from securitizing its assets.

Some of the assets he identified for the government to consider are the following;

Corporate Assets: Which are government wholly-owned or majority equity holdings in State-Owned Enterprises, SOEs.

Financial Assets: Which represent the government’s minority equity holdings in Joint Ventures and other companies

Tangible Non-Financial Assets: Taking the steps of commercializing and securitizing idle lands and buildings, amongst other assets.

Giving further insight on capital flows, he identified foreign direct investment, FDI and Remittances as the major types that Nigeria should utilize.

He gave an example of Saudi Arabia that has developed a privatization plan worth $ 100bn, which will bolster the liquidity of the Gulf nation.

Dr. Teriba also referenced the Liberalization and Privatization plans of India, that has positioned the densely populated nation, as one of the leaders in FDI.

The CEO of Economic Associates was of the strong view that Nigeria needs a robust strategy to attract more foreign investments to compensate for lost export revenues.

In an interactive session with participants, he called on Nigeria to explore how it can leverage the Diaspora remittances, noting Africa was one region that had a challenging environment for remittances. Currently has a foreign reserve of approximately $45bn which can triple within a year, if it prioritizes unlocking liquidity through the various capital inflow options available.

Coming into 2019, considering various views on FX stability and expected calmness in the polity post-election had revealed an improvement in economic growth over the year. Notably, growth was projected to be anchored on stronger performance in the non-oil sector as the lower investment in the oil sector– save for the addition of the Egina oil field – amidst shut-ins at key oil exporting pipelines will result in slower growth in the oil sector and by extension a much slower contribution to overall GDP. Notwithstanding, the optimism of stronger contribution from the non-oil sector, has boosted the impact of the innovative programmes by key industry players in the ICT on the overall subsector growth. Reflecting the improved activity in the ICT subsector in Q1 19, coupled with recovery in both the Agriculture and manufacturing sectors, economists expect a much robust growth in GDP over 2019 by 20bps to 2.2% YoY (FY 18: 1.9% YoY).

Starting with the harbinger of growth, some economists retain their surmise on most sub-sectors in the nonoil territory with slight changes to services – driving a nonoil sector growth of 1.8% YoY (FY 18: 2.1% YoY). While some made an upward adjustment to the growth assumption for ICT subsector, the high base of growth in the prior year, the lull in the real estate and slower growth of credit creation in financial services is expected to constrain the rate of growth for the overall services sub-sector. In the ICT subsector, the upward projection to the assumption emanated largely from the now telling impact of the innovative customer acquisition programs. For financial services, notwithstanding the recent policies aimed at enhancing private sector lending – there are not much traction, as banks remain cautious in growing their risk assets. Lastly, there’s a believe that activities in real estate sector would remain muted given its oversupplied state. That said, activities in services is expected to expand modestly by 1.7% YoY (FY 18: 3% YoY).

On Agriculture, there is an optimistic view of a recovery in crop production due to favorable weather and government intervention aimed at curbing ongoing conflict in the northern region. On the government intervention, the RUGA (rural grazing area) settlement program was recently proposed, which requires each state to provide lands for the herders to grow their cattle. Though the program was suspended due to kickbacks from various states, there are positivity on some form of concession by the State government given the critical nature of the sector. Further buttressing the point is the ongoing discussions on a peace pact between the Zamfara state government and armed bandits in a bid to improve farming activities in the state. That said, economists expect the sector to grow by 3.2% YoY (FY 18: 2.3% YoY).  Elsewhere, while the general elections slowed activities in the manufacturing sector, some economic pundits see some traction in the sector beyond Q1 2019. Further upside would be payment of the minimum wage approved at the start of the year and successful implementation of the presidential order to clear the Apapa gridlock which had been a strain on producers over the last two years due to difficulty in transporting raw materials. That said the manufacturing sector is expected to grow by 2.13% YoY.

In the oil sector, it was highlighted at the start of the year that the plausible risk to crude oil production would be the resumption of militant attacks during the first quarter of 2019 should the electoral process get violent. With militant attacks out of sight, there is no impending risk to overall production asides minor pipeline leakages. Asides that, additional 200,000bpd capacity from Egina oilfield which resumed operations in January further supports the stance of increased production. For context, while NNPC is yet to provide any data on Nigeria’s oil production this year, the channel checks with external sources reveals that actual production touched 2mbpd (condensates inclusive) in April. That said, it is expected average oil production to print at 2.04mbpd – 6.4% higher than the prior year. Thus some economists suggest that the Nigerian economy will experience a 2019 growth estimate of 2.2% as against an initial prediction of 2% as a result of improvement in both the oil and non-oil sector.

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