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Buhari administration on track to double Nigeria’s fiscal deficit
Nigeria’s budget deficit is expected to rise to 2.59 trillion in 2019 according to the Federal Government’s Medium Term Expenditure Framework 2019 – 2021. If this is approved in the 2019 fiscal budget, the Buhari Administration will be on track to incur a total budget deficit of a whopping N12.8 trillion in 4 years.
Government fiscal deficits are the summed differential of the government’s total actual fiscal expenditure and actual fiscal revenue where the expenditure is higher. Every year since at least 2011, the government of Nigeria has budgeted a higher expenditure than revenue leading to a total budget deficit of over N13 trillion between 2011 and 2018. However, under the Buhari administration, actual deficits have turned higher than budgeted as the government misses out on revenue targets.
Deficits under Buhari
According to data from the Budget Office, the Buhari administration budgeted a total of about N8 trillion (including N1.53 trillion it inherited under the Jonathan administration) between 2015 and 2018. In terms of actual, it incurred a deficit of N7.5 trillion between 2015 and 2017 compared to N 6 trillion which was budgeted. 2018 budget is still on course.
Since the administration took over in 2015 Nigeria has witnessed an unprecedented drop in fiscal revenues as the country’s grappled with an oil-induced crushing recession. Between 2015 and 2017, the government has earned a total revenue of about N8.8 trillion compared to a budgeted revenue of N12.3 trillion representing a shortfall of about 29%. The dismal performance, particularly in 2017 where actual revenue was N2.6 trillion compared to a budget of N5 trillion ballooned budget deficit to about N3.8 trillion, the highest years.
Buhari inherited a bad economy
To be fair, President Buhari inherited a very bad economy making it mandatory that it increases recurrent expenditure to grind the economy out of recession. At the time he took over Brent Crude oil prices were on a downward spiral trading at about $65 and ending the year at about $36. By 2016 oil got to a year low of $27. The administration also grappled with militant activities that exacerbated Nigeria’s economic situation severely impacting the country’s oil output.
Typically, government’s rely on increased spending A.K.A. stimulus during the recession to help jump-start economic activities in the country. This culminated in a budgeted expenditure of about N6 trillion in 2016 out of which N4.3 trillion was actually spent. In 2017, the government increased its budget to an all-time high of N7.4 trillion out of which N6.4 trillion was spent.
As explained, the government had to borrow to fund its recurrent and capital expenditure plans.
Why it matters
A higher budget deficit means the government will continue to borrow to fund its revenue shortfall. The obvious implications here are two folds. Firstly, the government which currently borrows about 40% of its revenue from the local debt market face higher interest rate payments.
If the government borrows at a significantly higher interest rate then the private sector will continue to borrow at high double-digit rates further depressing economic growth. Already, lending rates range from 19% per annum to over 26% cutting across various forms of lending (personal, corporate loans, mortgages).
Also, the government’s renewed drive to borrow in foreign currency has increased total external debt stock to about $22.08 billion under this administration as Q2 2018. Whilst interest rate is cheaper on foreign borrowings, the country stands the risk of paying much more if we face another massive round of devaluation.
Furthermore, debt service as a percentage of government revenue which currently stands at about 62.5% of government revenue is expected to rise further in 2018 if the government misses its revenue estimates again.
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Secret behind MTN’s blistering performance
Despite COVID-19 disruptions, MTN Nigeria’s 2020 financials showed marked improvements compared to its 2019-year-end.
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How does a bank make N19 billion a month?
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers.
How does a Financial Services Group make N19b a month, post a Profit After Tax figure of N230b in an environment where global commerce virtually ground to a halt in 2020?
The Zenith Bank Plc (Zenith) Year-end 2020 final results are a blockbuster, not just in the quantitative, but the qualitative as well. In all major headline numbers, Zenith posted growth on a Year-on-Year basis, specifically, Gross Earnings are up 5.2%, Net Interest Income up 12%, Customer deposits up 15.3%.
Somehow Zenith grew her loan book by 18% in a recession and reduced the volume of Non-Performing Loans in the same period. Zenith was also able to post a higher revenue number from non-interest income even as yields on fixed-income fell across Nigeria. I must stress, Zenith has posted these results by servicing her target segment of the high-end corporates in Nigeria.
READ: Union Bank Nigeria Plc posts N15.9 billion profit in 9M 2020, up by 2%
So how did Zenith achieve this? I want to do a deep dive into how to make profits in a recession. However, it is important to start with a background on how banks make money which is basically in two ways;
- Interest income: which is income generated from the bank gathering deposits from customers and investors and “renting” out these funds to individuals and corporates for a fee called interest. Interest Income is seen as the main business of banks. It is a measure of how well the bank has fine-tuned its people, process, and systems to generate returns from a commodity called cash.
- Non-Interest Income: This is the income the bank generates from deploying its brands and people to juice revenues from activities that do not necessitate a transfer of cash. For Example, a bank asset management business leverages the bank’s skillsets to earn fees by providing investment advice to clients. Does a business want to expand? The bank can advise on the process to make that happen.
READ: Zenith Bank spends N20 billion on IT in 2020, up 122%
The strategy for banks globally is to attract deposits at a lower rate than it lends out to borrowers. This allows the bank generate a spread between cost and revenue. The bank’s interest spread can be magnified by the number of quality loans it creates as Interest Income rests also on the quality of the loan book. Positive spread drives the funding of other banking services and is supported by the banks internal competencies to manage risk
So a bank makes profits by
- Attracting cheap deposits
- Earning positive spread
- Providing value addition for a fee
- Effective Risk Management
All these have to happen simultaneously. A bank that sources expensive deposits by paying higher rates generates a lower spread. Lower spread exposes the bank to cost overruns and will prove fatal to long-term growth.
READ: Zenith USSD banking transaction value rises by 30.8% Y-o-Y to hit N497.29 billion
With this in mind, let’s review Zenith FY 2020 Performance
- Attracting Cheap Deposits: In 2019, Zenith’s total interest expense, which represents how much it paid to get deposits was N148b, that figure dropped in 2020 to N121b. this means the bank was able to grow deposits by 25% but at a lower cost. How? Zenith changed her deposit mix, reducing borrowed funds/leases and time deposits by 41% and 38% respectfully and increasing the share of current accounts by 155%. By swapping the deposit mix, the bank’s cost of funds ratio fell by 18mn%.
- Earning Higher Spread: Zenith grew Net Interest Income by 12.2% in 2020. This figure represents income earned from the deposits and investments of the banking group. Again, this was achieved by asset mix reorganization. In the face of falling rates especially on shorter-dated FGN instruments, Zenith shifted allocation from Treasury bills to longer-dated FGN bonds which paid a higher yield. Zenith’s Non-interest Income also grew to N275b a 5% jump from 2019. This is driven largely by extraordinary items including foreign currency revaluation gain, which is the gain realized from the revaluation of foreign currency-denominated assets. I must highlight this. Zenith was able to post a gain of about N43b which is a 256% gain from FY 2019 based on the Naira being devalued to the US Dollar.
- Providing Value Addition: Value addition will include all non-core banking services Zenith Group provides to the public including subsidiaries like the Zenith Penson Custodians which has N4t in assets under custody. Commission on agency and collection was a big contributor to Zenith’s non-core banking revenue.
- Risk Management: Zenith was efficient in deploying its internal competencies to minimize and avoid risk and impairments from the ordinary and extraordinary course of business. Zenith like other financial institutions saw a pullback in commercial activities from her clients. Take the Commerce subsector, the Non-Performing Loan share in that sector grew from 9% to 24%. Zenith, booked an increase in the number of NPLs by volume to N125m in FY 2020 but the bank was able to keep the NPL ratio down to 4.29%. An extraordinary feat.
Overall, the bank was able to navigate a difficult year and post a good return and a handsome dividend of N3 to investors. Zenith was able to achieve all this while increasing the staff strength by 4.6% to 7555 employees.
However, there are red flags as well:
- Net Interest Margin was down in FY 2020 as yields declined. If yield continues to stay muted, can Zenith keep finding profitable avenues to invest that N5.34 deposit base?
- Interest income positive in FY 2020 at 420b but when compared to 2017, interest income is falling.
- If you ignore the revaluation gain, then Non-Interest income will be considerably muted, possibly negative in FY 2020
- Fees on electronic products fell 36% in an environment where online banking has been not just sound business practice, but life-saving as well.
Overall, in an environment with months of local and international shutdowns, Zenith has posted good numbers and demonstrated it is possible to eke out gains from a hard environment. When one looks at the dividend yield, P.E. Ratio of the bank, for me, this is a Buy.
