FBNQuest projects 30% Debt to GDP, say policies convergence long overdue|Analysts at FBNQuest Capital www.fbnquest.com have shown their support for monetary and fiscal policies convergence towards pushing strategic economic course that would find equilibrium solution for prosper.
In its review of additional debt takes, analysts at the firm said: “Our estimate of additional categories of debt would push up the burden to a maximum 30% of gross domestic product (GDP)”.
FBNQuest in its fourth quarter 2019 fixed income report observed a trend that monetary policies authorities are looking for support from their fiscal counterparts, and FBNQuest thinks this is long overdue.
Analysts at the firm stated that there could be a solution at hand for the further challenge of a tortuous annual budget process.
It noted that the president has directed that the budget and calendar years should be harmonised with effect from 2020.
However, analysts think the fact that the current National Assembly is less obstructive than its predecessor in Buhari’s first term should help.
This has helped in signing of the budget 2020, which happens to be one of the fastest since Nigeria returned to democracy in 1999.
The report noted that the FGN deficit is capped at 3% of the gross domestic products (GDP) by the Fiscal Responsibility Act of 2007.
The implementation reports of the Budget Office of the Federation suggest a breach of the ceiling in 2017 and 2018.
It views that the story of the general government deficit, which is tracked by the IMF and others, is less rosy.
“The greater issue is that a large proportion of recurrent spending by the three tiers of government – federal, state and local- is unproductive”, FBNQuest stated in the report.
It further revealed that gross revenues collected in the federation account (before distribution to the three tiers) recovered by 35% year on year in 2018, to N9.6 trillion or US$31.1 billion.
The oil component rose by 36% to N5.5 trillion on the back of marginally higher output due to less sabotage and a US$19 per barrel rise in the average spot price of Bonny Light.
Non-oil revenues rose by 34% to N4.1 trillion. The total collected was equivalent to just 7.5% of GDP, compared with 6.2% in 2017.
FBNQuest analysts said this is pitifully low for a major oil producer and a lower-middle income country.
Analysts stated that the oil majors will say otherwise but this tells us that the proposed increase in the tax take from their industry is warranted.
“The ratio also highlights the challenge for the authorities to persuade Nigerian taxpayers to meet their obligations after several decades of noncompliance”, FBNQuest analysts noted.
Officials have hinted that the total take has since risen to 8% of GDP. A plausible medium-term target should be closer to 20% in our view, the analysts stated in the note.
By structure of the Nigerian economy, Oil production and prices are the main drivers of the monthly distribution by the Federation Account Allocation Committee (FAAC) to the three tiers of government.
FBNQuest figures show that FGN retained quarterly revenues since 2010 have ranged from N539 billion (in Q2 2015) to N1.18 trillion.
This makes for difficult budget planning and creates “lumps” in the release of funds for capital programmes.
Perhaps with an eye to previous aggressive targets, the 2019 budget projects a 2% nominal decline in FGN spending to N8.92 trillion.
“On the surface, therefore, we have a projected double-digit decline in spending in real terms.
“The reality is that revenue targets are heady, most of all for the non-oil economy, and that the FGN has to trim capital spending so as to keep its deficit in manageable proportions”, FBNQuest stated.
It further stressed that although this is far below budget, capital spending would appear to be on an upward trend from the budget office’s data.
According to the firm, the implementation reports show capital spending by the FGN of N701 billion in 2017 and of N739 billion for 2017 in 2018, which we take as the continuation of the 2017 budget year until the following year’s budget was signed off (in June 2018).
On the same basis, the reports show a total of N1.65 trillion for 2018. The federal finance ministry has had some successes in imposing spending discipline.
This includes slashing government travel and conference costs, continuing the removal of ghost workers and pensioners from the payroll, reviewing tax exemptions and capturing previously concealed revenues as a result of the launch of the treasury single account (TSA).
The report reads that whenever revenue collection underperforms, the FGN has to choose between trimming its capital spending plans for the budget year or allowing the deficit to spiral out of control.
“Precedent points to the trimming alternative although an overshoot is to be expected”, analysts reckoned.
The budget office’s implementation reports show unfunded FGN deficits- after authorised borrowing through the Debt Management Office/DMO- of N1.30 trillion in 2017 and N1.90 trillion for 2018.
The projected deficit in 2019 was to be covered by external and domestic borrowing (of N850 billion in both cases), and unspecified privatisation proceeds of N210 billion.
FBNQuest said:”within the president’s intervention on harmonisation, we understand that ministries were instructed to push capital programmes into the 2020 budget year”.
The 2019 year was to be compressed into about six months – from the president’s sign-off on the budget to the end of the calendar year – according to the plan.
Analysts revealed that by the time of the intervention, the DMO had already met its domestic borrowing target.
DMO had pushed the external component into the new budget year as FGN plans to focus on low-cost concessional borrowing from multilateral and bilateral partners.
Analysts at FBNQuest said: “However, if this is not available on the scale sought or it is slow in being disbursed, then the FGN can always tap the sovereign Eurobond market.
“Indeed, the federal finance minister has indicated that this may well occur in early 2020.
“Investor appetite for such bonds from emerging/frontier market issuers has been consistently strong, and has received a further boost from the new direction at the Fed”.
A combination of the healthy yields for all investors including FPIs and limited investment alternatives for the pension funds underpin demand for FGN bonds at the DMO’s regular auctions.
The pension funds are the pivotal players at the bond auctions, FBNQuest stated that without them the work of the DMO would be far more challenging.
It added that the stock of FGN debt is modest by any criteria. In contrast, the cost of servicing the FGN’s domestic debt has soared, from just N354 billion in 2010 to N1.48 trillion in 2017 and N1.80 trillion in 2018.
About 85% of the debt service burden is due on the FGN’s domestic obligations.
The last two quarterly reports from the DMO have shown that the burden has started to ease as a result of its policy of externalisation which is deploying Eurobond proceeds to pay down NTBs.
FGN domestic debt in Q2 2019 amounted to N13.4 trillion, equivalent to just 10.5% of 2018 GDP.
“When we add its external debt and the debt of the states, the burden rises to 20.1%”, analysts said.
These obligations exclude the naira borrowings of state governments, the obligations of the NNPC and other public-sector bodies such as the Assets Management Corporation of Nigeria (AMCON).
Additionally, we will have to incorporate federal debts up to a ceiling of N2.7 trillion to contractors and other private-sector parties which the finance ministry unearthed in December 2016 and is in the process of securitising.
The data for Q2 includes promissory notes of N710 billion already issued to such creditors.
“Our estimate of these additional categories of debt would push up the burden to a maximum 30% of GDP”, FBNQuest estimated.
The firm said in line with established convention, this does not allow for the FGN’s overdraft with the CBN for the unauthorised element of its deficit.
It recalled that in June 2016 the DMO published a new strategy and carried forward its target of a 60/40 split between the domestic and external debt obligations of public debt-FGN and state governments combined.
The blend amounted to 84/16 at end-2015 and had improved to 68/32 in June 2019. The strategy is designed to prevent “crowding out”.
The intention is to take advantage of the interest rate differential between Eurobonds and FGN bonds of similar tenor.
“That differential still favours Eurobonds in the middle and long end of the curve by about 500 basis points.
“The strategy is also justified by the fact that at end-June 56% of the FGN’s external debt stock was due to multilateral agencies, principally the World Bank and African Development Bank groups, at below-market rates”, FBNQuest stated.
