On Wednesday, President Muhammadu Buhari presented the proposed federal budget for 2017 tagged “the Budget of Recovery and Growth” to the National Assembly with FGN proposing a 20% YoY expansion in aggregate expenditure to N7.298 trillion split into: non-debt recurrent expenditure (41%), capital expenditure (31%), debt service (23%) and statutory transfers (5%).
Removal of JV cash calls and higher recoveries underpin bullish stance on revenues: To implement the proposed 2017 fiscal outlay, the FGN projects retained revenues of N4.94 trillion (+28% YoY) largely underpinned by higher oil receipts (+142% YoY to N1.9 trillion) and a nine-fold YoY jump in ‘other’ revenues to N780 billion. On the non-oil side, the 2017 budget assumes lower estimates for independent revenues (-47% YoY) and non-oil receipts (-5% YoY). In his budget speech, the President announced that joint venture (JV) oil production between NNPC and IOCs would now be subject to a new funding mechanism to allow cost recovery for IOCs which would remove the fiscal strain of funding JV operations from NNPC oil sales.
Production headaches dim JV cash optimism: As earlier stated, the key driver of higher oil revenues is the removal of the obligation to fund JV cash calls, which have accounted for an average 32% of ‘crude oil revenue to the federation over the last six years. Going forward, the FGN proposes an alternative funding structure, under which JV fields would fund operations as independent entities allowing for cost recovery. While details about the deal are still developing, we think optimism of the NNPC’s estimates is hinged on production assumptions of 2.2mbpd. Given that these JV operations remain within reach of militant attacks, as opposed to the deep offshore platforms under PSC arrangements, we express reservations over the oil production estimates (2.2mbpd).
Recurrent still trumps capital spending: On the spending side, total recurrent expenditure is expected to print at N5.1 trillion (69% of total) split across Personnel cost (36%), Debt service (33%), and Overheads and Statutory transfers which make up the rest. On the capex side, breakdowns provided reveal prioritization of Power, Works, and Housing, as well as Transportation, which jointly constitutes 48% of planned capital expenditure for 2017.
Limited external financing points to another record year in local paper issuance: In 2017, the FGN intends to finance an estimated N2.36 trillion fiscal deficit largely through borrowings (98%) with a greater emphasis on local debt (54% of planned debt). However, as in 2016, when FGN was unable to follow through with its targeted evenly split debt mix, we think uncertainty over the external leg would again translate to higher than expected reliance on domestic sources. Importantly, in the wake of recent calls for the CBN to cap its financing of fiscal deficit to regulatory limit of 5% of prior year’s revenue, we estimate that the apex bank’s deficit financing should contract 58% YoY to N145.7 billion in 2017 by our estimate, leaving the government at the mercy of domestic debt markets.
Having obtained board approval for disbursement of the $1billion AfDB budget support facility, we assume the item as a given and played out varying scenarios over potential Eurobond issuance now slated for Q1 17. In our base case of a $1billion issue – which is the amount the government sought to obtain in November 2016—we estimate that to finance the budget, the FGN would need to increase net debt issue by at least 15% YoY to N1.6 trillion. Given our reservations regarding the feasibility of certain revenue lines, our estimates should be read as a floor for potential domestic debt issuance in 2017.