A better process next time please!

The 2017 budget was approved by the National Assembly on 11 May so we are now waiting for the sign-off by the acting president or the president. At that point the FGN will publish the detail but for now we are dependent upon the media for the outline figures. We will confine ourselves to five brief comments on the content.

First, we endorse the increase of US$2/b in the average oil price assumption to US$44.5/b. This leaves some room manoeuvre in the event of any underperformance on the output assumption of 2.20 mbpd. The record of OPEC for quota compliance is not brilliant and the resilience of the US shale oil industry may have been understated. However, when we allow for the gentle pick-up underway in the global economy, we are quite comfortable with US$44/5/b.

Second, we also like the allocation of N77bn for the amnesty programme. The fact that the amount has been raised from N65bn in the president’s budget speech in mid-December points to a shift in official thinking. The forces of pragmatism have established the correlation between payments within the programme and the incidence of sabotage. The shift adds to the credibility of the assumption for crude output this year.

Third, the president’s speech pledged to hold FGN spending on personnel to about N1.8trn. Data from the CBN for January and February suggest that this has been achieved but then we had the May Day speech promising a new national minimum wage. The fallout from the last increase included the rapid accumulation of payment arrears at state government level, which has led the FGN to launch five separate debt relief initiatives. In these circumstances talk of another rise came as a surprise.

Fourth, the budget has set capital spending at N2.24trn, which compares with the actual figure of a record N1.20trn for the 2016 budget year (through to 06 May). We would expect the FGN to fall short of its target because its underlying revenue projections are ambitious. Further, governments everywhere struggle against logistical and organizational hurdles to implementing their capital programmes. A 50 per cent increase on the 2016 outturn would still have a useful impact, particularly if it was accompanied by an improvement in project management and delivery.

Fifth, the media coverage implies a deficit of N2.50trn for 2017 and refers to borrowing of N2.36trn. Our take is that the small balance (of N140bn) is to be raised from a combination of asset sales, recoveries, signature bonuses and the like. The deficit would fall comfortably within the 3 per cent of GDP ceiling set in the Fiscal Responsibility Act. We assume that the domestic component of the borrowing remains N1.25trn, and note that the Debt Management Office has already raised N750bn from its first five monthly auctions of the year.

On the external side, the FGN has collected US$1.5bn from the sale of its 15-year Eurobond. (It is a shame that its hands are effectively tied behind its back and that it was not able to take greater advantage of the strong oversubscription.) The balance of the projected external financing for this year (and last) will prove a greater challenge: whereas buyers of the Eurobond appear to have had a cursory look at the external balance sheet and approved its content, the multilaterals rightly insist upon detailed discussion of policy and plans for which the FGN does not appear always to have the stomach and the skills-set.

Gregory Kronsten
Head, Macroeconomic & Fixed Income Research

Source: Business Day, 22 May, 2017.
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