Fitch: Nigeria Targets Consolidation but Revenues May Fall Short

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Nigeria’s 2018 budget aims to narrow the government deficit, but revenues are still highly dependent on oil, and non-oil revenues are likely to fall short of the budget projections, Fitch Ratings says. 

President Muhammadu Buhari presented the budget to parliament on 7 November. The “Budget for Consolidation” sees the Federal Government of Nigeria’s (FGN) fiscal deficit narrowing to 1.7% of GDP in 2018, from the 2.8% that Fitch expects for 2017. We expect rising oil revenues to aid consolidation, but forecast the FGN deficit to narrow less, to 2.4% of GDP.

The key to achieving the envisaged deficit reduction is fully realizing revenue forecasts, but this has proved challenging in the past. Nigeria’s overall revenue/GDP ratio is among the lowest of Fitch-rated sovereigns. We expect that overall revenue will continue to increase in 2017 and 2018 as oil production increases and the economy recovers from recession, but more slowly than budget forecasts envisage.

The budget speech reported that revenue collection was 14% below target as of September 2017, which would be a significant improvement over 2016, when net distributable revenue was 36% below budget forecasts. Tax revenue growth is likely to have accelerated in 2H17 with faster economic growth, which rose to 1.4% in the third quarter but is still unlikely to meet budget targets. The prospectus for Nigeria’s recent Eurobond offering shows that, at end-June 2017, total revenue for 1H17 was just over 30% lower than the 2017 budget forecast. Fitch’s forecast for 2017 GDP growth is 1.5%.

Boosting non-oil revenue is a key pillar in the government’s reform agenda, but the structural changes needed to improve tax compliance will only progress slowly. One-off increases in independent revenues and the recovery of stolen funds may help, but these brought in significantly less revenue than projected in the previous two budgets.

The 2018 budget assumes NGN2.4 trillion (USD6.7 billion) in FGN retained oil revenue, based on a budgeted oil price of USD45 per barrel. This is well below Fitch’s forecast that Brent crude will average USD52.5 per barrel in 2018, but the budget’s production assumption of 2.3 million barrels per day (mbpd) is optimistic. It would represent a six-year production high and a meaningful and sustained increase in current levels of around 2.0 mbpd. Improvements in security and oil infrastructure have boosted production in the last 18 months, but insurgent activity in the Niger Delta, sabotage and theft are risks to production forecasts. Meanwhile, reforms to the Nigerian National Petroleum Corporation will take time to substantially increase production.

Higher revenue is key to deficit reduction. Spending has typically been lower than budgeted, but improved financing conditions should support stronger execution of capital expenditure plans in 2018.

President Buhari stated that rapid approval of the 2018 budget would help ensure “a more predictable budget cycle that runs from January to December” and avoid a repeat of the delays in approving last year’s budget. Legislators seeking more spending in their respective states will remain an obstacle to a smooth budgeting cycle ahead of the next general election in 2019.

The budget does not contain official consolidated deficit forecasts. We forecast the consolidated government deficit to narrow by 0.5pp of GDP to approximately 4.0% in 2018, broadly in line with the narrowing FGN deficit. Nigeria’s general government debt stock is low relative to GDP but rising, and low revenues and the fragility of the economic recovery represent risks to public debt sustainability. This is reflected in the Negative Outlook on the country’s ‘B+’ sovereign rating, which we affirmed on 31 August.

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