EUR 3.54 For Business Accounts Only

Nigerian Fiscal: One Step Closer, Several More to go

• We continue with the serialization of our core strategy document – The Nigeria Strategy Report, with today’s excerpt focusing on developments in the fiscal space over H1 2017. We also delineate our view on the feasibility of FG’s 2017 projections and implications for government borrowing farther out.​

• ​After much congressional delays, the National Assembly finally passed the 2017 appropriation bill, more than four months after its submission by President Muhammadu Buhari, in May 2017. The approved document now reflects an increase in proposed fiscal expenditure to N7.44 trillion (vs. N 7.298 trillion in the initial draft) primarily due to an upward review of proposed recurrent spend (+5% to N5.282 trillion) with proposed capital expenditure notably lower by the same margin. On balance, given the largely consistent changes on both the revenue and expenditure fronts, projected deficit is largely unchanged at N2.36 trillion (vs. N2.20 trillion in 2016) still to be predominantly financed by borrowings (~98%) from local and foreign sources.​

• Importantly, our earlier concerns about the overly optimistic nature of FG’s revenue projections have already materialized with actual federally retained revenues over the first five months of 2017 sizably lower than budget target (-55% at N1.015 trillion). In our view, the unimpressive oil and gas receipts corroborates earlier fears of sizable shortfall in crude production (~1.7mbpd over Q1 17) relative to a bullish budget expectation of 2.2mbpd. On the non-oil leg, CBN pinned non-performance to overall slowdown in economic activities with corporate taxes, VAT, and independent revenues more than 50% below government’s expectation for the period.

• Going into the second half of 2017, increased budgetary allocations to amnesty and better conciliatory efforts, which have already reflected in the number of pipeline vandalised points and the late re-opening of Trans Forcados in May, speak to potential increase in crude production. Even then, FG’s projection for oil output of 2.2mbpd remains overly ambitious in view of limited investments into the sector which continues to reflect delays in passing the other tranches of the PIB addressing the fiscal aspect of oil and gas. On the non-oil leg, major components of VAT, CIT, and Customs are yet to reflect the improvements on FX front that are slowly driving improvements in company performance and overall macro (as evidenced by the FX-led rebound in non-oil GDP in Q1 17).

• Thus, we now forecast FG retained non-oil revenue at N1.4 trillion (vs. N1.6 trillion in previous estimate and N3.0 trillion in budget target). The foregoing, combined with oil revenue estimate of N1.8 trillion suggest an FGN retained revenue of N3.2 trillion (36% lower than in the proposed budget). Overall therefore, we project fiscal deficit at N4.3 trillion or 83% greater than government projection. For context, entire government borrowing has thus far met only 29% of our estimated deficit. Thus, assuming even a lower budget implementation of 80% (vs. 88% thus far in 2017), we see scope for sustained high FG issuance in the coming months.