Markets, Investment Analysts Not Impressed With 2017 Fiscal Plans

Financial market parameters have indicated large scale apathy towards the recently announced 2017 budget and fiscal plan of the federal government.

All the key market statistics have so far shown either indifference to the plans or turned negative.

Following the budget presentation last week by President Mohammadu Buhari and subsequent details announced last week by the National Planning Minister, Udoma Udo Udoma, the stock market reversed its three weeks’ up-trend, money market rates largely remained unchanged while foreign exchange market went into further distress.

Just as Udoma finished his presentations in Abuja on Monday last week, equity traders began to take profits, selling off shares, thereby halting the positive buying trend that had lasted three weeks on the heels of the international oil price surge in the first three weeks of December.

The profit taking, according to stockbrokers was a show of lack of confidence in the stability and growth of the economy which the budget failed to address. Hence speculators in the stock market preferred short term perspectives in their investment behaviour.

The equities market closed that Monday on a negative note, as the Nigerian Stock Exchange All Shares Index, NSE ASI, depreciated by 0.45%  to close at  26,586.56 basis points, compared  with the  0.56%  appreciation recorded previously. Also its Year-to-Date (YTD) returns which had, in the first week of December, began to reverse a long-drawn negative trend, returned to negative pressure, moving from -6.8% to  -7.18%, that Monday.  These negative statistics in the stock market deteriorated further until Thursday.

While some analysts believe the market situation was as a result of an uninspiring budgetary provisions and fiscal plan for 2017, some see it as part of year-end winding down impact.

Meanwhile, the money market interest rates continued its fluctuations during the periods of the 2017 budgetary announcements up till last week as money dealers said the pronouncements hardly touched on fundamental issues that could swing market directions.

However, they believed that lack of serious attention to macroeconomic challenges in the fiscal plan would leave market and other economy operators with frenzy reactions. Hence the operators of the parallel market of the foreign exchange had began to jack-up exchange rates of world’s major currencies with Naira depreciating further to about N490/USD last weekend while some observers forecast a deterioration to about N500/USD by the turn of the new year.

During the week, President Buhari presented the 2017 federal budget before the Legislature. In line with expectations and similar to 2016, the budget was presented as expansionary with   government’s policy thrust to lift the economy from the current recession remaining biased toward fiscal stimulus.

Proposed expenditure for 2017 was put at N7.3 trillion, which is 20.4% larger than N6.1trillion in 2016. Total revenue is projected at N4.9 trillion, 28% higher than N3.9 trillion in 2016 and fiscal deficit at N2.3 trillion, implying a deficit to GDP ratio of 2.2% to be financed by both domestic and foreign borrowings.

The 2017 budget was based on assumptions of a 2.5% GDP growth in 2017, 2.2 million barrels per day oil production volume (same as 2016), US$42.5 average price per barrel of oil and exchange rate of N305.00/US$1.00.

Breaking down the expenditure components, recurrent spending accounts for 35.3% (N2.6 trillion) of aggregate expenditure, up 8.7% from N2.3 trillion in 2016, while capital expenditure is projected to rise by 41.1% to N2.2 trillion, representing 31% of the total expenditure.

Debt service is projected to be third largest component of total expenditure, proposed to grow 8.7% year-on-year to N1.7 trillion as a consequence of increasing debt obligations while taking up 23% and 33.6% of gross expenditure and revenue respectively.

Commenting on the budgetary figures, chief economists at FSDH Merchant Bank Limited, Mr Ayodele Akinwunmi, told Vanguard that the 20% increase in cash outlay for spending may not indicate expansion in activities given the exchange rate and inflation figures that have deteriorated Naira value since last budget.

He stated: “Although the figures may not look great if you adjust it for the rising inflation rate and the current weak exchange rate compared with what these figures were last year, a few things stand out for me in the policy thrust that was rolled out during the budget presentation:

“The abolition of the budget JV cash-calls in the funding of the upstream oil Joint Venture projects; The introduction of the tailor-made Public Private Partnership (PPP) Model for the funding of infrastructure in the country; Continuation of the Amnesty programme and the increase in the allocation for the programme”, among others.

He however, said he would have preferred that the government increases the proportion of the deficit finance that would come from the external sources in line with the strategy it announced earlier.

“This is not to put too much pressure on the domestic interest rate”, he stated.

Reacting to the budgetary estimates and fiscal plan, analysts at Afrinvest West Africa, a Lagos based investment house, stated:

“We are sanguine on estimates for oil revenue despite bullish assumption on oil production (2.2mbpd vs current 1.8mbpd), as we expect the conservative estimate for oil prices (US$42.50/b against outlook of US$55.0/b) and almost certain adjustment of forex rate lower than the N305.00/US$1.00 assumed for the budget to offset.

“However, we are less optimistic on Non-Oil (tax revenue) and independent revenues given the poor performance rate of both in 2016, unchanged policy guidance on tax rate as well as constrained manufacturing output and consumer spending dragging tax income.

“Income from Corporate Income Tax (CIT) was 62.7% less than expected while independent revenue was only 14.2% of projection for half year. Thus, the FGN has largely relied on deficit financing to balance its books, with fiscal deficit as at first half of 2016 reported at N1.5 trillion (66.6% of total approved for full year 2016), implying a fiscal deficit to GDP ratio of 3.2% compared to 2.1% legislated and 3.0% ceiling for a full fiscal year.

“Clearly, underpinning the ambitious 2017 spending plan are overly optimistic assumptions which belie fundamental economic realities & policy environment. Thus, despite the optimistic projected revenue, we are cautioned by the fact that actual government revenues have remained pressured and performance rate would be either of the following two scenarios to play out in 2017:

“Fiscal deficit expand above 2.2% of GDP in the proposed budget to be financed exclusively with domestic borrowing at the expense of tighter monetary policy and crowding-out of the private sector.

“Government eventually forced to make concessions on tax rate and FX market structure to boost Naira revenue and access long term concessionary external financing.

“We think a mixture of both scenarios will play out with the government likely opting for the former in H1:2017 before embracing the latter on account of fiscal pressures.”

Giving its own views on the credibility of the fiscal plan 2017, analysts at CardinalStone Partners Limited, another Lagos based investment house, stated: “Oil production at 2.2mbpd is largely dependent on the success of ongoing talks with the Niger Delta community. Even then, the assumption is largely optimistic as oil production has consistently underperformed budget estimates in the last 3 years.

“Given planned OPEC output cut (about 500-700 tbpd) and expectations of a supply/demand rebalancing next year, there’s a strong likelihood that realized oil price for 2017 might be higher than the benchmark used in the budget.

 


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