During the week, President Buhari presented the 2017 FGN budget before the National Assembly. In line with expectation and similar to 2016, the budget is expansionary as government’s policy thrust to lift the economy from the current recession remains biased toward fiscal stimulus. Proposed expenditure for 2017 is N7.3tn, which is 20.4% larger than N6.1tn in 2016. Total revenue is projected at N4.9tn, 28.0% higher than N3.9tn in 2016 and fiscal deficit at N2.3tn – implying a deficit to GDP ratio of 2.2%to be financed by both domestic and foreign borrowings. The 2017 budget was based on assumptions of a 2.5% GDP growth in 2017, 2.2mb/d oil production volume (same as 2016), US$42.5 average price per barrel of oil and exchange rate of N305.00/US$1.00.
Analysing the expenditure components, recurrent spending accounts for 35.3% (N2.6tn) of aggregate expenditure - up 8.7% from N2.3tn in 2016 - while capital expenditure is projected to rise by 41.1% to N2.2tn – representing 31.0% of the total expenditure. Debt service is projected to be 3rd largest component of total expenditure, proposed to grow 8.7% Y-o-Y to N1.7tn as a consequence of increasing debt obligations while taking up 23.0% and 33.6% of gross expenditure and revenue respectively.
In a clear demonstration of policy agenda to improve infrastructure stock and create a more healthy balance between recurrent and capital spending, the Ministry of Power, Works and Housing will receive highest capital allocation which is proposed at N529.0bn or 23.6% of the capital budget. Nonetheless, the challenge remains ample implementation of the projected expenditure as actual capital expenditure in 2016 as at September stood at N753.6bn – representing a performance rate of 63.3% of annualized figures for the period. On the flipside, recurrent expenditure could possibly exceed projection as actual recurrent expenditure in H1:2016 stood at N1.5tn, above estimated N1.2tn prorated estimate for H1:2016.
The structure of 2017 budget revenue proposal shows a significant deviation from the model adopted in the 2016 budget. In a bid to reduce dependence on oil revenues as the major source of revenue, Independent (operating surpluses of MDAs) and Non-oil revenue were projected to account for 39.1% and 38.2% of total revenue respectively in 2016, while oil revenue represented 18.6%. However, the 2017 budget shows a reversal as oil revenue is projected to account for 40.0% (N2.0tn) of total while Non-oil and Independent revenues represent 27.8% and 16.3% or N1.3tn and N806.6bn respectively. Additional N565.1bn is expected to be raised from recovered looted funds and N210.9bn from other sources including mining licenses.
We are sanguine on estimates for oil revenue despite bullish assumption on oil production (2.2mbpd vs current 1.8mbpd), as we expect the conservative estimate for oil prices (US$42.50/b against outlook of >US$55.0/b) and almost certain adjustment of FX rate lower than the N305.00/US$1.00 assumed for the budget to offset. However, we are less optimistic on Non-Oil (tax revenue) and independent revenues given the poor performance rate of both in 2016, unchanged policy guidance on tax rate as well as constrained manufacturing output and consumer spending dragging tax income. Income from Corporate Income Tax (CIT) was 62.7% less than expected while independent revenue was only 14.2% of projection for half year. Thus, the FGN has largely relied on deficit financing to balance its books, with fiscal deficit as at H1:2016 reported at N1.5tn (66.6% of total approved for FY:2016), implying a fiscal deficit to GDP ratio of 3.2% compared to 2.1% legislated and 3.0% ceiling for a full fiscal year.
Clearly, underpinning the ambitious 2017 spending plan are overly optimistic assumptions which belie fundamental economic realities & policy environment. Thus, despite the optimistic projected revenue, we are cautioned by the fact that actual government revenues have remained pressured and performance rate would be less than desired. We expect either of the following two scenarios to play out in 2017:
- Fiscal deficit expand above 2.2% of GDP in the proposed budget to be financed exclusively with domestic borrowing at the expense of tighter monetary policy and crowding-out of the private sector.
- Government eventually forced to make concessions on tax rate and FX market structure to boost Naira revenue and access long term concessionary external financing.
We think a mixture of both scenarios will play out with the government likely opting for the former in H1:2017 before embracing the latter on account of fiscal pressures.
November 2016 Inflation Report
The NBS released November 2016 Inflation report during the week and in line with forecast, Headline Inflation increased to 18.5% in November from 18.3% in the prior month as higher prices were recorded across all COICOP (Classification of Individual Consumption by Purpose) divisions. The Food sub-index increased 17.2 Y-o-Y, up 10bps from 17.1% in the prior month. Likewise, the Core sub index rose 18.2% Y-o-Y, up 10bps from 18.1% in October. As observed in recent months, we note that M-o-M CPI growth moderated to 0.7% in November from 0.8% in prior month. If this trend continues or M-o-M index growth is flattish in December as we expect, Inflation Rate (measured Y-o-Y) will moderate for the first time in December 2016 on account of high base in the CPI from 2015. We maintain our forecast of a 4.0 - 5.0 percentage points decline in Headline Inflation in 2017 due to high base factor.