Much to play for in 2018
We would all like to forget 2016 for the start of the recession and the deepening scarcity of fx. We could say the same for early 2017 before the creation of new fx windows by the CBN. Now a new year beckons, and with hopes of an improving economy.
This coming year may be written off in some quarters because of the lengthy run-up to the next presidential election in February
2019. This line of thinking takes two connected forms: that the run-up brings major macroeconomic slippage and that policymakers are too distracted by the politicking to pursue the FGN’s economic agenda.
We are skeptical about the first, having examined the data for government spending and different measures of the money supply in the build-up to the polls in April 2011 and March 2015. There was just the one clear example of slippage, a sharp increase in spending in Q2 2011 resulting from a rise in the national minimum wage. This was approved by the National Assembly and driven by the administration of the time. (We have to mention that organized labour has this year called for a substantial hike in the wage and that there have been hints from the presidency that an increment may be forthcoming.) If we are looking for slippage, we need look no further than Ghana, where alternate elections have become synonymous with twin deficits and IMF rescues.
The second reason underpinning the “lost year” theory for 2018 is that the government becomes distracted and takes its collective eye off the ball. Most governments, however, want to be re-elected and so come up with new initiatives to push development programmes and create jobs. The current administration is no exception, and its Voluntary Asset and Income Declaration Scheme (VAIDS) is an example of such an initiative.
It will be judged by the success of its expansionary fiscal policies. Indeed it is confident that 2018 will bring some rewards for those policies. Its wish list could include the completion of some road projects, a visible improvement in power supplies (off a low base, admittedly), a rise in rice and other farm output, job creation in the productive segments of the public sector such as education, some asset sales and perhaps some progress on the industry bill.
In order to push ahead on infrastructure spending, the FGN has to raise its game on revenue collection and implement its borrowing strategy. The Nigeria Customs Service created a surprise last week by announcing that its collection in 2017 had reached a record N1trn. Data from the office of the accountant-general of the federation (OAGF) show collection from customs of just N133bn in H1 2017.
We may not be comparing apples with apples in this case but the same series from the OAGF has total FGN revenue in the six months at N2.43trn, and so only just short of the pro rata target for the period of N2.54trn. The take from its 48.5 per cent share of pooled revenues in the six months hit 75 per cent of target, and collection from its independent revenues just 27 per cent. However, the take from miscellaneous other revenues was close to three times the pro rata target of N350bn. This outperformance was made possible by a transfer of more than N500bn to the consolidated revenue fund, an exchange-rate adjustment and a special distribution from the excess crude account. Whilewe cannot be sure that these were not welcome one-offs, we have heard from semi-official sources that total FGN revenues reached N3.3trn in 9M 2017, equivalent to two-thirds of the full-year projection. .
The position is clearer on the implementation of the borrowing strategy, given the successful Eurobond roadshow in November to raise US$3.0bn, the go-ahead from the National Assembly to “externalise” longer-tenor T-bills up to a set ceiling and the success of the Debt Management Office (DMO) in comfortably exceeding its funding target for calendar 2017.
The calendar and budget years have diverged because of the repeated failure of the executive and the legislature to complete the annual budget process in a timely manner. For the 2018 budget, passage before the end of Q1 looks challenging. The delay should at least enable the FGN to convert its borrowing proceeds into capital releases in the 2017 budget year.
The FGN’s successful borrowing programme, together with the CBN’s market strategy, have lowered the FGN’s borrowing costs considerably. If we take the DMO’s monthly auctions of FGN bonds in August and December, we find a fall of more than 350bps in the marginal rates for the five and ten-year benchmarks. The FGN does not include average borrowing costs among the assumptions it shares in public in its budget documents. We would be surprised, however, if its 2018 budget proposals assume a decline of this magnitude although they surely allow for a shift in its total debt stock towards a higher (and cheaper) external component. The proposals have total debt service (including payments into a sinking fund) in 2018 of N2.23trn, rising from N1.84trn in 2017.
So we do not view 2018 as a lost year and see the scope for the FGN to deliver on its expansionary fiscal strategy. The degree of its success depends as ever on channeling its revenues into capital releases, and its releases into well executed projects.
Head, Macroeconomic & Fixed Income Research
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