Traders’ Voice…“Blessed are the young, for they shall inherit the National Debt.”

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Digital naira NATIONAL DEBT investors Santa came early but with T&C
Afolabi Sotunde Illustration Naira

We finally got a glimpse of the budget performance for 2021 as Nigerian Minister of Finance, Budget & National Planning, Zainab Ahmed, presented a draft of the Medium-Term Expenditure Framework 2022-2024 to stakeholders last week.

All eyes were on revenue performance given the economic recovery and the significant improvement in crude oil prices, but as usual, revenue sustained its lacklustre performance as FGN’s retained revenue for Jan 2021 to May 2021 was N1.84 trillion, 67% of the target.

5-year revenue trend

national debt Traders-Voice
Source: Budget office, Comercio Partners
2021*: Jan 2021-May 2021

A further breakdown shows the FGN share of oil revenues was N289.61 billion (which represents 50% performance of pro-rata) as the cut in oil production quota under its OPEC+ affiliation has significantly put constraints on Nigeria’s revenue despite the improvement in crude prices.

However, we saw a somewhat positive development in the non-oil revenue, which recorded N618.76 billion revenue (99.7% performance of pro-rata). This was largely driven by Companies Income Tax (CIT) and Value Added Tax (VAT) collections, which were ahead of the budget targets by N290.90 billion and N123.85 billion, representing 102% and 125% respectively of the pro-rata targets.

The 5-year trend of expenditure

national debt Traders-Voice
Source: Budget office, Comercio Partners
2021*: Jan 2021-May 2021
national debt Traders-Voice
Source: Budget office, Comercio Partners
2021*: Jan 2021-May 2021

On the expenditure side, N4.86 trillion (representing 92.7% of the pro-rated budget) has been spent from January 2021 to May 2021. The bulk of this spending was skewed towards debt service and personnel cost, which took N1.80 trillion and N1.50 trillion respectively from the total expenditure. While capital expenditure which is meant to be a growth factor, was underrepresented, contributing 23% (N973 billion) of total expenditure.

Debt sustainability…

national debt Traders-Voice
Source: Budget office, Comercio Partners
2021*: Jan 2021-May 2021

One very concerning variable from the presentation was debt service to revenue. Why is this important? The debt service to revenue is a key ratio in determining your fiscal position. Its shows the percentage of actual revenue to your debt repayment. It is only suitable to have a low debt service to revenue ratio, which means you have additional revenue to carry out capital projects.

However, in a situation where you have a very high debt service to revenue, it simply means you have little cash to invest in capital expenditure which is gravely needed in a country like Nigeria with a huge infrastructure gap.

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Another key thing to note is that despite this huge revenue gap, we continue to allocate a huge share of our expenditure to personnel cost (35% of total expenditure), which will only continue to put further pressure on our debt service.

Given the sustained recovery in economic activity due to the reopening, we expect the non-revenue to maintain its stable performance, with company income tax and VAT being a major driver. However, we expect oil revenue to remain depressed as OPEC output constraints continue to dampen revenue, with Nigeria’s crude oil output down by 350,000 barrels per day.

Consequently, we expect the deficit to increase in the second half of 2021, which will translate to more borrowing and more supply of securities in the fixed income market, which could ultimately cause yields to rise.

OPEC: Clash of titans

It was surprising to see Saudi Arabia and UAE go head-to-head at the recent OPEC meeting, as both countries have presented a united front in the past. The spat between both countries led to OPEC members ending the meeting without a deal, tipping the cartel into crisis, leading to further supply squeeze and a rise in prices.

The disagreement was largely driven by Saudi Arabia’s decision to extend the current agreement until the end of 2022.

Saudi Arabia oil minister Prince Abdulaziz said that without an extension of the agreement, there’s a fallback deal in place — under which oil output doesn’t increase in August and the rest of the year, potentially risking an inflationary oil price spike. Brent crude jumped 1.3% to $77.12 on the back of this news, the highest since 2018.

Brent Crude

Given that OPEC was unable to agree on a date for its next meeting, we expect the rally in crude oil to persist in the near term. Consequently, we may likely see a positive effect on the SSA Eurobond market as a sharp increase in crude oil prices will bode well for Nigeria’s crude oil earnings.