Nigeria’s 2025 budget bill, with its mammoth N49.740 trillion expenditure and N13.388 trillion deficits, presents a fiscal puzzle with high stakes for the stock market.
While the government heralds it as a transformative plan to propel economic growth, the reliance on debt financing and its cascading effects raises uncomfortable questions about sustainability and investor confidence.
Will the budget catalyze the equity market, or is it merely papering over structural cracks?
Debt overload: Banking on borrowing
The government’s plan to finance 97.67% of the deficit through debt; 69.29% from domestic and international debt instruments, and 28.28% from multilateral loans, creates an immediate talking point.
With debt service obligations pegged at N16.327 trillion, 44.91% of aggregate revenue, places a significant strain on the government finances.
The implications for the stock market are double-edged. On the one hand, a ramp-up in local borrowing could benefit financial institutions. Banks, historically heavyweights on the Nigerian Exchange, stand to gain from heightened activity in fixed-income markets.
The appeal of risk-free returns on government securities could lift earnings for listed banks, driving investor interest in their shares.
The banking sector regained momentum in the second half of 2024 to record an average YtD gain of 27% after the bearish first half of 2024, where it recorded an average 16.95% YtD loss due to CBN policy announcements.
It is expected that in 2025 the banking stock performance will outperform 2024 performance and even surpass the 2023 impressive performance of average YtD gain of 128.41%
Yet, this borrowing binge may come with a cost: the crowding-out effect. As the government dominates the debt market, private sector access to credit will likely tighten, pushing borrowing costs higher, especially with companies turning to short-term commercial papers for short-term liquidity.
The surge in government borrowing and its appeal to institutional investors may divert funds away from corporate issuances, driving up yields. This spells higher finance costs for businesses.
The ripple effects could be severe. Industrial and consumer goods companies are already grappling with contracting profit margins, mounting losses, and even negative shareholders’ funds, driven by escalating finance costs and foreign exchange losses.
The increased cost of funds would further erode their profitability, making it harder to service existing debts or invest in growth opportunities.
This downward trajectory in profitability will likely translate into reduced earnings per share (EPS), a key metric for stock valuation, pressuring share prices further.
While the industrial and consumer goods sector displayed resilience in 2024, managing to sustain a positive average year-to-date (YtD) share price gain, they underperformed compared to their strong 2023 performance, reflecting the growing strain from elevated finance costs and foreign exchange losses.
Revenue: A weak link
The government’s revenue assumptions of 94.60% from the federation account, 9.53% from independent revenue, and a paltry 2.33% from taxes reflect a long-standing over-reliance on oil.
This dependency exposes the economy and by extension the stock market, to global oil price volatility.
Companies like Seplat Energy, Aradel and Oando could benefit if crude prices remain buoyant, but the broader market remains hostage to external shocks.
Meanwhile, the underwhelming tax revenue contribution signals missed opportunities in fiscal policy.
The New Tax Bill (NTB) probably aims to address this by increasing the capital gains tax rate to align with corporate income tax (27.5% in 2025) and raising the taxable threshold to N50 million.
While this may boost government revenue, it could discourage high-value equity transactions and erode liquidity in the stock market.
Listed companies may face higher equity financing costs, compounding existing pressures on profitability and valuations.
Infrastructure spending: The bright spot
The government’s commitment to infrastructure development could be a game changer.
The total capital expenditure (CAPEX) constitutes 35.90% (N17.856 trillion) of the total budget.
Increased public spending on roads, bridges, and energy infrastructure should spur growth in the industrial goods and construction sectors.
Companies like Dangote Cement and Lafarge Africa are well-positioned to reap the benefits, potentially driving their share prices higher.
Moreover, privatization plans to fund 2.33% of the deficit through asset sales may inject fresh opportunities into the market.
The risk of complacency
Despite these opportunities, the budget’s glaring structural weaknesses cannot be ignored.
- The insignificant revenue contribution from Nigerian owned enterprises and independent revenue sources raises concerns about long-term stability and sustainability.
- When local enterprises are not contributing significantly to the budget, it suggests that these businesses are not operating efficiently or that there are systemic issues such as corruption that are hindering their productivity and growth.
- According to a World Bank report, the implications of inefficient SOEs for development are significant: studies have shown that if SOEs were just 5% more efficient, GDP could be 1–5% higher.
- Foreign investment is disincentivized in markets like this. Foreign investors are already wary of Nigeria’s macroeconomic instability, and this aspect might be seen as another red flag.
A balancing act
- The 2025 budget is a mixed bag for the Nigerian stock market. It offers hope for targeted sectors, such as banking, industrial goods, and oil and gas, while posing significant risks tied to increased finance costs, exchange rates, and fiscal sustainability.
- For investors, the challenge lies in navigating these contradictions. Active portfolio management, with a focus on defensive sectors and companies poised to benefit from government spending, will be key.
- However, without structural reforms to diversify revenue, manage debt sustainably, and stabilize the macroeconomic environment, the Nigerian stock market risks remain a reflection of the country’s broader fiscal vulnerabilities.
- The stage is set for 2025, but whether it will be a bull run or a bear crawl remains to be seen.
