On Tuesday, President Muhammadu Buhari presented the 2018 Appropriation Bill titled “Budget of Consolidation”, to the joint session of the National Assembly for passage. The President, in addition to reeling out the expenditure plans of yet another expansionary N8.6tn budget for 2018, took time to address several other macroeconomic concerns ranging from security, socio-political tensions, economic reform programmes of his administration, structural improvements - which yielded fruit as Nigeria moved up 24 places in the World Bank Ease of Doing Business Ranking 2018 - and the implementation of the 2017 budget as well as legislative and revenue constraints that hampered performance. As with prior years, the 2018 Budget projects a reflationary spending of N8.6tn (16.2% increase relative to N7.4tn in 2017) with a focus on consolidating on gains recorded in the previous year whilst also prioritizing the need to bridge the investment deficits in Infrastructure, Agriculture, and Health sectors amongst others. The Budget assumes an exchange rate of N305.00/US$1.00, Oil production of 2.3mb/d, and benchmark crude oil price of US$45.00/b to achieve a forecast GDP growth of 3.5% with annual inflation projection of 12.4% for the fiscal year 2018.
On the basis of the revenue projection, FGN’s share of oil and gas revenue is estimated at N2.4tn while non-oil revenue - including Company Income Tax (CIT), VAT, Customs & Excise Receipts, Independent Revenues and income from other sources as well as proceeds from the restructuring of FGN’s equity in JVs – is projected to account for N4.2tn. On the expenditure side, recurrent debt and non-debt are proposed to make up N5.5tn (63.9%) of the total spending while capital expenditure is planned to contribute N2.4tn (28.2%) and statutory transfer N451.5bn (5.3%). Fiscal deficit is also expected at N2.0tn implying 1.8% debt to GDP although debt service to revenue ratio is estimated at 30.5%.
We highlight below, our specific thoughts on the revenue assumptions as well as the expenditure projections:
- While the budget assumes variables which are not far off from current realities save for the projected exchange rate of N305.00/US$1.00, we are of the view that for the economy to move past its current state, a truly market determined rate needs to be adopted. The current FX regime suggests an FX rate of N360.00/US$1.00 – N370.00/US$1.00 at the Investors and Exporters’ (I&E) FX window. Hence, a projected exchange rate of N305.00/US$1.00 for 2018 seems like a far cry from the reality more so that the government could have taken advantage of the market rate to increase the collectible fiscal revenue on behalf of the Sub-National governments who keep struggling to meet up with wage bill amid the dwindling oil revenue.
- The 2018 Budget estimates revenue at N6.6tn – implying a deficit of N2.0tn - with oil revenue (N2.4tn) and non-oil revenue (N4.2tn) accounting for 36.9% and 63.1% respectively. Although we think the oil revenue assumptions seem conservative in light of the reality of domestic production and the upbeat performance of the global oil prices, we perceive non-oil revenue prospects for the fiscal year as somewhat wishful given that the effort of government to diversify her revenue through various tax reforms is yet to yield the desired optimal fruits. So far in 2017, performance of the “Budget of Recovery and Growth” has been rather underwhelming with fiscal authorities falling short of revenue target, especially Non-oil revenue (0.3tn actual vs. N1.4tn projection), despite recent drive to increase tax revenue via reforms such as the Voluntary Asset and Income Declaration Scheme (VAIDS). While the Presidency hopes to improve on existing tax reforms to boost income from the Non-oil sector as well as enhance activities in other sectors of the economy, the odds of a significant increase in tax revenue in the short term remain low.
- The delay in passage of the 2017 budget stalled implementation of the capital expenditure bit of the budget, with only about N450.0bn expended from a prorated figure of N1.1tn for H1:2017. To address this, the 2018 Budget made provisions for a continuity of ongoing capital projects while sourcing for alternative means of funding to finance new projects. Consequently, the funds from the N100.0bn Sukuk bond raised in 2017, are expected to be channelled towards the development of 25 key roads across the country while government continues to leverage on PPP arrangement for some critical projects such as the financing of the Bonny-Bodo Road and Apapa Wharf-Toll Gate Road. Also, Power sector Reforms were included in the 2018 budget of consolidation. The President hinted on the plan to raise an African Sovereign Green Bond by December 2017 to aid the ailing sector by way of financing renewable energy projects. Hence, a total of N2.4tn (27.9% of total budget) will be expended on capital projects for the 2018 fiscal year. Our view is that bridging the enormous infrastructure gap in the country cannot only be resolved by the government whose revenue capacity as well as room for leverage is already being stretched. As much as we align with the position of government on the need to continue to invest in infrastructure, it is pertinent to stress that the much of the spending can be done by the private sector through PPP arrangements if the appropriate structures and framework for financing are put in place.
In conclusion, the presentation of the 2018 Budget of Consolidation by the President may be a necessary condition towards reflating the economy, fixing some of the nation’s structural imbalances and resetting Nigeria on a path of recovery and growth; but, the sufficient condition to achieving this will fundamentally depend on speedy and hitch free passage as well as proper implementation in order for the budget to achieve the desired result.
Implications of Moody’s Downgrade
During the week, Moody’s Investor Service downgraded the Nigerian Government’s long- term issuer and senior unsecured debt rating to B2 from B1 while keeping rating outlook stable citing reasons ranging from unsuccessful efforts toward having a robust non-oil revenue base which leaves the economy exposed to further economic or financial shocks and high debt servicing cost which is projected to remain high. Despite Moody’s downgrade, we do not expect to see any negative kneejerk reaction from investors with regards to interest in Nigerian debt securities especially the Sovereign Eurobonds. Our views are further supported by the fact that Moody’s latest downgrade only puts Nigeria’s rating at par with S&P “B” rating while Fitch’s rating is still higher at “B+”. Hence, we opine that successive issuances of foreign debt instruments will remain largely successful as investors’ preference for high-yielding emerging and frontier market debt instruments linger.