Nigeria faces N1.3 trillion spending gap at $70 oil

Nigeria faces the negative prospects of a N1.3 trillion cut in government spending next year, if oil prices trade at an average of $70 per barrel in 2015, unless the government chooses to spike bond issuances and widen the deficit to maintain spending close to this year’s level.

With Brent crude averaging $103 dollars per barrel so far in 2014, Nigeria’s gross Federal Account Allocation Committee (FAAC) budgetary disbursements to the three tiers of government was equivalent to N6.359 trillion between January and October 2014.

Nigeria’s Bonny Light trades at a slight premium to Brent.

Calculations show that

if oil prices were to average a somewhat optimistic $70 a barrel for all of 2015 there would be a revenue gap due to the three tier of government of about N1.3 trillion, when this year’s spending levels are compared to next year’s.

The calculations were derived by BusinessDay’s assumptions that oil’s portion of the FAAC revenues were 80 percent or N5.08 trillion for the period.

Plugging in a 32 percent slide in oil prices (if oil averages $70 and assuming production stays at roughly the same rate of 2.2 million bpd next year) gives oil revenues of N3.45 trillion for the first ten months of 2015.

There will be some fiscal gains from the devaluation of the naira to N168 per dollar from N160/ $ used in the 2014 budget.

This is calculated by converting N3.45 trillion to dollars at N160 and multiplying the dollar value ($21.59 billion) by N168.

This gives a value of N3.627 trillion, which is then added to the non oil portion of the budget of N1.63 trillion (which we are optimistically assuming will remain constant next year) for a total of N5.25 trillion.

This value (N5.25 trillion) is then subtracted from the N6.359 trillion to get the estimated shortfall of N1.102 trillion or an average of N110 billion a month.

The absence of any meaningful oil savings in the Excess Crude Account (ECA), leaves the Federal Government and states with the option of running huge deficits to stem the potential cutback in spending which could lead to a recession or much slower growth next year.

Embedded in the 2014 Federal budget is a N912 billion short-fall projected to be financed primarily by bond issuances.

If the Federal Government decides to close the spending gap between 2014 and 2015 by issuing more debt, it could lead to higher interest rates being demanded by investors to hold such debt.

The 2014 budget already projects to spend N712 billion on interest payments on outstanding debt issued.

The yield on 16.39 Jan 2022 10 year benchmark Federal Government bonds rose by 0.21 percent to 13.66 percent, according to Tuesday prices from the FMDQ.

Nigeria’s fiscal framework is overly reliant on oil revenue, which accounts for around 70-80 percent of consolidated revenue.

Despite the elevated oil price in recent years (averaging about USD 110/bbl in 2012-13), the authorities have been unable to rebuild a fiscal buffer to withstand the present oil-price shock.

“The lack of meaningful oil windfall savings suggests that Nigeria’s fiscal vulnerability kicks in well above the $77.5/bbl oil price benchmark included in the 2014 budget,” Samir Gadio, Head of Standard Chartered bank’s Africa Strategy and FICC Research said.

A new benchmark oil price of $73 a barrel is being proposed by the government to the National Assembly for the 2015 budget, compared to the earlier $78.

Ngozi – Okonjo Iweala, finance minister also proposed to lower the Federal Governments budget expenditure by 6 per cent to N4.66 trillion ($27 billion) for next year.

Analysis suggests the finance ministers’ assumptions are overly optimistic.

Businessday