SAT, 03 OCT, 2020-theGBJournal-The Federal Executive Council (FEC) recently approved the NGN13.08 trillion budget proposal for the 2021 fiscal year, representing a 24.6% increase from the 2020 revised budget. With projected revenue of NGN8.60 trillion, the FEC expects the total deficit for the 2021 fiscal year to print NGN4.48 trillion, translating to 3.6% of the projected GDP.
Key assumptions of the proposed budget include an oil price benchmark of USD40.00/barrel, oil production of 1.86mb/d, an exchange rate of NGN379/USD, and an inflation target of 11.95%.
Although the proposed revenue is greater than the NGN6.15 trillion stated in the MTEF, we suspect that the variance stems from the upward adjustment in the exchange rate assumption (MTEF: NGN360/USD) which translates to higher estimates naira receipts from oil sales.
According to analysts at Cordros Research, the FGNs revenue expectations are rather optimistic, given that aggregate revenue has averaged NGN3.94 trillion between 2017 and 2019 and revenue performance from Jan-July 2020 was only 68.0% despite the exchange rate devaluation.
‘’Given the structural weakness in tax revenue, we expect the projected revenue to underperform, implying a larger than projected deficit,’’ Cordros said in a note to theGBJournal.
Meanwhile, Fitch Ratings revised Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable, from Negative, and affirmed it at ‘B’. This was based on the stability in oil prices (USD40/barrel-USD45/barrel), support from multilateral agencies, and easing of restrictions in movement. Fitch also noted that the FX demand backlog and persistence in external vulnerability are adequately captured by the ‘B’ rating.
Significant intensification of external liquidity pressures or a renewed downturn in oil prices and a sharp rise in general government debt to revenue ratio are the main factors that that could lead to a downgrade in the next action.
The rating is likely to be maintained in our view, given the expected stability in the oil price around the current level and CBN’s capital flow management measures.
We, however, see further legroom for an increase in general government debt over 2021 based on the government’s need to spend its way out of recession amid structural weakness in revenue generating capacity.
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