Positive budget proposals: just pass it!
While we wait for the National Assembly to conclude its debate on the 2017 budget proposals, we look for promising trends in the FGN’s fiscal stance. Happily, we have identified several. This is fortunate since the authorities’ hopes of lifting the economy out of recession this year rest largely upon the fiscal stimulus in the budget. We make no apologies for the many figures in this column: an analysis of the budget would be worthless without them.
There are some welcome developments to report on the revenue side. The first is the new realism in the projection of N1.37trn for the FGN’s share of non-oil revenue collection in 2017. This is clearly warranted when we consider that total revenue in January-September amounted to N2.17trn, compared with the full-year budget of N3.86trn and representing a 25% shortfall on a pro rata basis. The underperformance can be traced both to sabotage of infrastructure in the Niger Delta and to overambitious targets on the non-oil side.
The second positive on revenue in the proposals is the projection of N1.98trn for the FGN’s share of oil revenue. It is a positive because of a subtle movement in the FGN’s position on insecurity in the Niger Delta. The FGN now acknowledges that it has to engage the said militants and the vice president is making regular visits to the delta for talks with community leaders.
Further, it has incorporated payments under the amnesty in its current budget proposals. To paraphrase its own words, the diversification of the economy away from oil requires a sizeable boost to oil revenues. There is evidence that the new approach is successful. The NNPC’s latest monthly report puts production of crude oil and condensates back at 1.92 mbpd in November, the highest level since April. This recovery in output, which has since been maintained, is offered in semi-official circles as the explanation for the increase of US$5.0bn in gross official reserves since end-October.
A third positive on revenue is that the FGN has adopted a conservative average oil price assumption (of (US$44.5/b), which compensates for a more challenging assumption on output (an average of 2.20 mbpd). This is a combination that we have seen several times before.
Turning to the spending proposals, the president’s budget speech to the assembly noted that the FGN had maintained personnel costs at N1.80trn. This is consistent with the federal finance minister’s figure of N165bn per month (once we exclude pension payments and gratuities). Indeed, there are savings to be made from the culling of “ghosts” within the continuous audit of the payroll launched last year by the minister.
The screaming headline in the proposals is the projection of N2.24trn for capital spending by the FGN, which has to be treated with some caution since it would be easily the largest ever achieved in nominal terms. CBN data suggest that this administration is moving in the right direction. In the 12 months to September 2016, recurrent spending and capital outlays amounted to N4.02trn and N980bn respectively; for the 12 months to the previous September, the figures were N3.57trn and N500bn.
It would be a stellar jump to the projection for this year, and we would be surprised if the FGM achieved it. However, a rise to, say, N1.5trn would mark a sizeable fiscal stimulus as well as rich pickings for cement producers and services companies supporting the construction industry.
Our assumption is that the FGN’s fiscal stance is expansionary yet responsible, and that it would rein in capital outlays in the event of an underperformance on revenue. We suspect that it will find itself in just this position because the healthy rise projected for non-oil revenue collection is based on improved coverage and compliance without any increases in tax rates.
The budget proposals set the FGN deficit at N2.36trn, of which N1.07trn (US$3.5bn) is to be funded externally. The US$1.0bn Eurobond sale was a good start, and it is a pity that the FGN was not able to take greater advantage of the oversubscription. The balance will be borrowed largely on concessional terms.
The weak point of the budget proposals and the overall credit story is the soaring cost of domestic debt service. The DMO started well in January, raising N215bn towards its funding target for the year from the monthly auction of FGN bonds. However, it had to set stop rates close to 17.00%. The proposals put total debt service at N1.66trn, more than 90% of which is domestic. This burden presents 33% of projected aggregate FGN revenue. The 2017-19 Medium Term Expenditure Framework has a further increase to N1.93trn in 2019. The expansionary stance must have a limited life span if the burden of domestic debt service is not to suffocate the economy and take the “crowding out” of lending to the real economy to a new level.
The expansionary budget proposals are the fastest route for Nigeria to emerge from its recession this year. We see the recovery in oil production, and investment in a few sectors (notably energy/petrochemicals and agriculture) as having supporting roles. We forecast growth at a modest 2.0% in 2017. The sooner the assembly can complete its budget deliberations, the sooner the capital releases can start. In 2016 the president signed off in May and the releases began in June.
Gregory Kronsten, Head, Macroeconomic & Fixed Income Research, FBNQuest