RenCap delivers verdict on Nigeria economy

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    The FGN’s oil price assumption of $42.5/bl (vs $38/bl in FY16) is the only realistic assumption, given that the YtD oil price is $43/bl

    THUR, NOVEMBER 17 2016-The Federal Government of Nigeria’s (FGN) 2016 revenue was 50% below target at 6M FY16. Only 20% of capex had been executed, equivalent to the foreign borrowing share secured thus far. Debt servicing amounts to two-thirds of FGN revenue. The budget deficit stood at 3.2% of GDP vs the target of 2.2%, largely due to softer nominal GDP growth. Oil accounts for less than 50% of federally-collected revenue Federally-collected revenue (allocated to the federal, state and local governments) fell in 2Q16, for the eighth consecutive quarter, by 18% YoY to NGN1.1trn. This decline was led by oil revenue, which fell by one-third to NGN398bn. Oil’s contribution to revenue dropped to 46% in 2Q16 vs this decade’s peak of 78%.

    FGN revenue collections are 50% below target

    The FGN’s plan is to spend NGN6.1trn in FY16, of which it plans to source NGN3.86trn from revenue collections, and the remaining NGN2.22trn from debt. At 1H16, the FGN’s retained revenue amounted to NGN952bn, which is half of the prorata target of NGN1.9trn. The FGN’s below-target revenue collections were largely due to non-oil revenue, which came in 56% below target, at NGN324bn. Conversely, the FGN’s oil revenue was 13% above target at NGN406bn.

    Fall in non-oil revenue reflects malaise in economy

    Company income tax (CIT) is the largest source of non-oil revenue for the FGN. In FY16, the FGN planned for 60% of its non-oil revenue to come from CIT. At 1H16, CIT amounted to NGN324bn, which was only one-third of the pro rata target.

    Customs revenue – which accounts for c. 20% of the FGN’s targeted non-oil revenue

    – amounted to NGN163bn at 1H16, which is only two-thirds of the pro rata target.

    VAT – which accounts for c. 15% of planned non-oil revenue – came to NGN162bn, which is half of the pro rata target. The poor showing from CIT, VAT and customs revenues, in our view, reflects an economy in recession.

    Capex is 75% below target

    At 1H16, FGN had spent NGN2.5trn, which was 80% of target. The under-execution of the FY16 budget was entirely due to capex. Only 20% of the capex target, of NGN794bn, was spent in 1H16. This reflects the late passage and signing of the budget by the Senate and President Buhari, respectively, and the delay in raising NGN1.0trn in foreign loans for the budget. Conversely, recurrent expenditure (nondebt) was 12% ahead of target. Notably, spending on personnel costs was on target.

    Debt servicing amounts to two-thirds of FGN revenue

    Nigeria’s debt stock may be low, at c. 14% of GDP, however, it is the country’s high debt-servicing costs, relative to total spend and revenue, that will constrain how much additional debt the FGN can take up. In 1H16, debt servicing amounted to 25% and 64% of total expenditure and total revenue, respectively. That implies debt servicing is crowding out other expenditures, not least capex.

    Only 20% of the foreign borrowing requirement has been secured. Of the NGN2.2trn budget deficit, the FGN planned to finance NGN1.0trn with foreign loans, and the remaining NGN1.2trn with domestic borrowing. When the FY16 budget was signed, the interbank FX rate was NGN200/$1, which implied a foreign financing requirement of $5bn. This financing was expected to come in the form of loans of $1bn each from the World Bank and African Development Bank (AfDB), respectively, a $1bn eurobond issuance, and the remainder from bilateral loans from lenders such as China. In November, Nigeria secured a $600mn loan from the AfDB for budget support. This is the first inflow of the foreign financing that the FGN is targeting. And at today’s official interbank FX rate, it only accounts for c. 20% of the foreign borrowing requirement, by our estimate.

    Execution of the FY16 budget. Oil production in Nigeria’s fiscal years correspond with the calendar year (January-December). However, the late passage and signing of the FY16 budget by the Senate and President Buhari, respectively, in May, implied that the implementation of this fiscal year’s budget started late. It is for this reason that the FGN plans to continue implementing the FY16 budget until May 2017.

    FY17 fiscal outlook. The FGN plans to increase spending by 13% in FY17, to NGN6.87trn, according to the medium-term expenditure framework. Of that, the FGN plans to spend NGN1.77trn on capex. That implies an 11% increase in planned capex in FY17 vs FY16. The budget deficit is projected to widen by 22% to NGN2.7trn, which the FGN estimates will come to 2.5% of GDP. Given the dismal real GDP growth outlook for Nigeria in 2017, we think the FGN’s financing gap will be closer to 3.5% of GDP.

    The FGN’s optimistic oil production and FX rate assumptions, undermine the credibility of the FY17 proposed budget, as presented in the FGN 2017-2019 medium-term expenditure framework. The FGN has maintained what we consider to be its overly optimistic oil production assumption of 2.2mn b/d for FY17 (vs actual production of 1.93mn b/d in 1H16). The FX rate assumption of NGN290/$1 (vs NGN197/$1 in FY16), also appears to be unrealistic given that the official interbank FX rate is at NGN315/$1 today, the parallel rate at c. NGN450/$1, and there is little prospect of the external position improving in the short term. The FGN’s oil price assumption of $42.5/bl (vs $38/bl in FY16) is the only realistic assumption, given that the YtD oil price is $43/bl. (Note-story is unedited or re-written) TheG&BJournal

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