2020 Budget Review: Implication for Fixed Income Market

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Recently, Nigeria’s Minister of Finance, Zainab Ahmed, provided guidance through a mid-year budget review, in response to lower crude oil prices and its attendant negative impact on Nigeria’s oil revenue. Herein, we highlight the implications of the budget review for the fixed income market.

Clearly, Nigeria’s actual oil revenue for 2020 is expected to underperform the budget, as crude oil price continues to trade below the budget benchmark of $57.0/b ($33.0/b – as at the time of writing). Notably, as a response to the new reality, we believe there is so little the FG can do to ramp-up non-oil revenue to cover for the expected shortfall in oil revenue. Thus, only two options seem available to the FG in case the current reality persists, which is to drastically cut spending or borrow, to fill the expected gaps or a blend of the two options. However, with c. 70.0% of the budgeted expenditure being recurrent, there is so little the FG can cut in terms of spending.

Overall, we expect the FGN to explore more of the borrowing options to cover for the shortfall. Notably, with global risk levels and foreign investors apathy for Emerging/Frontier market asset now high, we believe a return to the international debt capital market might be an expensive option for Nigeria compared to local borrowings. Thus, our expectation is that local yields may trend higher across the benchmark curve in the near term as players position for new supply at an attractive rate.

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