FG’s Fiscal Position to Improve as Oil Rises 47% above Budget Estimate
The Federal Government’s (FG) fiscal position is expected to improve as oil price rises by 47% year to date above 2021 budgeted estimate despite pressure on demand.
Coming out from economic recession, Nigeria, a petrol-dollar powered largest economy in Africa is projected to experience improved fiscal position as foreign receipts from oil increase in the first quarter of 2021.
Noting the downside to revenue improvement, analysts posited that volume and prices have to be strong in order to maintain balance, especially as put in the budget for the year.
Following the outbreak of coronavirus in 2020, the Nigerian government revenue had plunged amidst widening deficit budget which raised debt level above N32 trillion.
In its schedule meeting for early March, the organisation of Petroleum Exporting Countries and allies (OPEC+) are expected to meet to deliberate on production arrangement.
But most analysts believe that it is more likely that the Oil cartel ministers would sustain status quo following higher compliance level by members’ countries in recent time.
However, the downside was picked in the arrangement as Saudi Arabia indicates this month it might reversed decision to cut supply by 1 million per day in March.
Overall, oil prices have maintained uptrend despite the fact that there have been some sorts of pressure on demand side.
Morgan Stanley sees Brent crude price hitting $75 per barrel towards the year end, while Barclay Bank in a report forecast $70 per barrel for Brent.
Since the start of 2021, oil prices continue to show momentum, up 27.5% year-to-date after gaining 7.9% and 18.2% in January and February –month to date- respectively.
Afrinvest in a macroeconomic report noted that whilst recovery in economic activities remains sluggish and uneven, the OPEC+ agreed cut continues to support prices combined with expected higher consumption due to the cold weather condition across Europe and the US.
At the January OPEC meeting, while Russia and Kazakhstan sought an increase of 65,000/d and 100,000/d respectively in production, Saudi Arabia unilaterally decided to cut its production by 1mb/d in February and March to 8.1mb/d.
However, global supply added 0.6mb/d as non-OPEC+ members pumped but prices appeared strong as United States largest producer, Texas, faces weather related hindrance.
This, couple from the US Federal Reserve Chairman’s position that benchmark interest rate will not be adjusted upward until recovery, thus halting possible quantitative easing at the time keep prices afloat.
Meanwhile, Asian economies continue to show a fast-paced recovery given the pick-up in activities. China reported 2.3% growth in 2020 and it is expected to grow at 7.4% in 2021.
That said, Afrinvest said the demand outlook for oil remains weak given the snail-paced recovery in global economic activities and continued restrictions due to the pandemic.
The IEA in its February report now expects oil demand to rise by 5.4mb/d from 5.5mb/d in January to reach 96.4mb/d for 2021.
The firm also that OPEC cut its initial demand forecast by 0.1mb/d to average 96.1mb/d for the year, lower revenue remains downside to expectation of stronger fiscal position.
“For the Nigerian government, actual revenue performance in Q1:2021 is expected to receive a boost from the recovery in oil prices.
“So far in Q1, oil prices have averaged $58.5 per barrel, 47.0% above the 2021 budget benchmark of $40.0/b ꟷ implying inflows into the excess crude account”, Afrinvest said.
However, the firm thinks the coast is unclear given the fragile rebalancing of the oil market on lower demand outlook and measures to contain the virus weigh heavily on recovery prospects.
“Based on past actual budget performance, shocks to oil prices would significantly drag revenue performance in 2021, resulting in wider deficits.
“If oil prices continue to trend higher, we expect the price modulation template of the PPPRA to reflect higher landing costs.
“This implies that Nigerians would pay higher pump price with major inflationary pressure in the near-term.
“With weak revenue performance, the FG lacks the capacity to take on subsidies.
“From estimate, the landing cost at current oil price level and using an exchange rate of ₦379/$1 is north of ₦180/liter, 9.1% above the NNPC pump price”, Afrinvest explained.
Naira Remains Stable across Market
Naira remains stable across the foreign exchange market this week. Oil prices inched higher with the benchmark Brent crude up by 6.7% above the previous week to $66.28/bbl. despite concerns about increasing supply.
On the domestic front, the external reserves declined marginally by 1.0% week on week to $35.2 billion.
Data from the currencies market shows that Naira traded flat at the Central Bank of Nigeria’s spot market at ₦379.00/$1.00.
However, at the parallel market, naira depreciated ₦4.00 to ₦482/$1.00. Also, at the Investors’ & Exporters’ (I&E) Window, naira depreciated 25kobo to ₦410.25/$1.00.
In its market note, Afrinvest said activity level in I&E Window surged 92.8% to $498.8 million from $258.6 million recorded in the previous week.
The total value of open contracts of the naira at the FMDQ Securities Exchange (SE) FX Futures Contract Market fell 20.0% ($1.5bn) to $6.0 billion as the FEB 2021 instrument (with a value of $1.6 billion) matured during the week.
In addition, the FEB 2022 instrument at contract price of ₦435.58 received the highest subscription of $175.5 million which took total value to $292.9 million.
On the other hand, the DEC 2021 instrument at the contract price of ₦432.58 recorded sell-offs totaling $82.1 million depleting total value to $333.3 million.
“We expect the exchange rates to remain range-bound at the various markets in the coming week”, Afrinvest said.
Similarly, in the money market, there was weak performance in the secondary treasury bills market.
The open buy back (OBB) and overnight (OVN) rates opened the week lower at 15.0% and 15.3% respectively from last week’s close of 20.0% and 20.5% as system liquidity settled at ₦80.8 billion.
As at Tuesday, OBB and OVN rates fell to 1.8% and 2.0% respectively as system liquidity rose to ₦659.3 billion following open market operations (OMO) maturities and coupon payment worth ₦476.4 billion and ₦49.9 billion respectively.
By the close of the week, the rates settled at 5.7% and 6.3% respectively as system liquidity printed at ₦565.8bn.
The apex bank conducted T-bills sales worth ₦128.2bn on Wednesday, same as maturing amount.
Demand for the 91 and 364-day instruments was strong with bid-to-cover ratio of 1.4x and 2.4x respectively. However, the 182-day instrument saw weak demand with a bid-to-cover ratio of 0.7x.
Stop rates inched higher at 2.0%, 3.5% and 5.5% compare with 1.0%, 2.0% and 4.0% in the previous auction for the 91-day, 182-day and 364-day instruments respectively.
The CBN also offered OMO instruments worth ₦330.0bn on Thursday, ₦4.5bn higher than total sales.
The 173 and 362-day instruments saw high subscription with a bid-to-cover ratio of 1.1x and 2.2x respectively while demand for the 96-day instrument was low at 0.9x.
Marginal rates were maintained at 7.0%, 8.5% and 10.1% for the 96, 173 and 362-day instruments respectively.
In the secondary T-bills market, performance was weak as average yield climbed 16bps to 1.8% from previous week.
The 91 and 182-day instruments saw sell pressure as yield rose 43bps and 6bps w/w respectively while the 364- day instrument was flat.
“In the coming week, we expect maturities worth ₦130.5bn from the OMO markets thus, we expect liquidity mop-up”, analyst said.
Meanwhile, the domestic bond market posted a positive outing this week as average yield declined 26bps to 9.2% from previous week.
Analysts noted that average yield declined on all trading sessions save on Monday (up 11bps).
Across tenors, the short and medium- term bond enjoyed the most demand following an 81bps and 25bps fall in yield respectively.
Meanwhile the long-term bonds saw sell-offs as yield rose 12bps week on week.
In the Sub-Saharan Africa (SSA) Eurobonds market, the bearish outing was sustained as average yield rose 38bps to 7.7% from previous week.
“This can be attributed to weak sentiment towards SSA instruments following rising yields in the US bonds (to a year high of 1.6%).
“All instruments under our coverage saw sell-offs save the Kenyan 2024 instrument, which recorded a 14bps yield decline.
“Sell pressures were dominant in the Ghanaian and Zambian 2022 instruments as yield increased 342bps and 105bps week on week respectively”, analysts explained.
Afrinvest noted that across the African Corporate Eurobonds market under its coverage, there was also a negative performance as average yield climbed 8bps from previous week to 4.4%.
The SEPLAT 2023 and ACCESS 2021 instruments saw high demand which pushed yield lower by 16bps and 11bps week on week respectively.
Conversely, there were huge sell-offs in ESKOM 2025 and NEERG ENERGY 2022 instruments as yields climbed 37bps and 24bps week on week respectively.
“In the coming week, we expect to see a sustained bullish outing in the domestic bond markets as investors seek higher yield.
“Meanwhile in the Eurobond space, the direction of the US bond yield remains the focal point thus guiding sentiment”, Afrinvest said.
FG’s Fiscal Position to Improve as Oil Rises 47% above Budget Estimate