Nigeria’s deficit financing options diminishing - Capital Economics
Africa Economics

Nigeria’s deficit financing options diminishing

Africa Economics Weekly
Written by Virag Forizs
This week’s 2021 budget presentation by Nigeria’s President Buhari points to challenges in financing the government’s ambitious spending plans, raising the risk that the authorities turn to financial repression policies, including outright deficit monetisation.

This week’s 2021 budget presentation by Nigeria’s President Buhari points to challenges in financing the government’s ambitious spending plans, raising the risk that the authorities turn to financial repression policies, including outright deficit monetisation.

If approved, the budget blueprint points to government spending rising by 21%, to N13.1trn, next year, which is expected to be matched by a jump in revenues to keep the budget deficit stable at 3.6% of GDP. The administration envisages (perhaps optimistically) that oil revenues will double next year, while an anticipated drop in non-oil revenues suggest that the government doesn’t hold out much hope for a strong economic recovery and/or effective efforts at reducing its reliance on oil receipts.

The authorities plan to finance the N5.2trn budget deficit in 2021 partly by a privatization drive (N0.2trn), and by loans from multilateral or bilateral creditors (N0.7trn), but mostly by issuing bonds on domestic and foreign markets (N4.3trn).

Unsurprisingly, officials stated their preference for securing concessional loans. Indeed, the budget envisages that the share of such financing would nearly double from 8% in 2020 to 14% of total financing next year. But it’s far from guaranteed that Nigeria will be able to secure soft loans.

The example of a $1.5bn loan request from the World Bank might be telling. Despite steps the government has taken towards market-friendly reforms, key sticking points remain – seemingly surrounding the currency – that have so far delayed the release of funds. The government doesn’t appear to have shed its unorthodox and protectionist tendencies, which could hinder future efforts to obtain concessional financing.

Instead, officials might have to rely on international bond issuance beyond what is currently outlined in the budget; the government envisages issuing half of new bonds on the foreign market (N2.1trn).

But it’s certainly possible that Eurobond issuance proves to be prohibitively expensive. The yield on the Nigeria EMBI Index, at 7.6%, is already quite high and market conditions remain vulnerable to swings in oil prices. Very few EMs issue sovereign dollar bonds with coupons above 8%. (See Chart 1.)

What’s more, even if the government pushed ahead with Eurobond issuance, this is unlikely to alleviate concerns about Nigeria’s weak capacity to repay its creditors. Debt service costs were equivalent to 73% of the federal government’s revenues in Q1.

Chart 1: EM International Sovereign Dollar Bond Issurance (2010-19)

Sources: Refinitiv, Capital Economics

Without sufficient funding from official creditors or private foreign investors, policymakers in Nigeria will probably have to resort to additional domestic borrowing. There are plenty of levers available to the government to encourage local banks to buy up sovereign debt. But there is a clear risk that, in a bid to keep its debt servicing costs in check, the central bank may be pressured to pursue more extreme financial repression policies, including deficit monetisation.

The week ahead

Hard activity data from South Africa will probably show that the recovery continued in August on the back of easing restrictions, but at a slower pace. In Nigeria, figures due out next week are likely to show that inflation in picked up from 13.2% y/y in August to 13.7% y/y in September.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

12th Oct

SA

Manufacturing Production (Aug.)

(12.00)

+7.6%

(-10.6%)

+2.5%(-9.2%)

13th Oct

SA

Mining Production (Aug.)

(10.30)

+20.2%

(-9.1%)

14th Oct

Gha

CPI (Sep.)

(+10.5%)

(+10.5%)

SA

Retail Sales (Aug.)

(12.00)

+1.9%(-6.8%)

15th Oct

Nga

CPI (Sep.)

(+13.2%)

(+13.3%)

(+13.7%)

Uga

Interest Rate Announcement

7.00%

SA

Quarterly Employment Statistics (Q2)

(10.30)

16th Oct

No Significant Data Released

Also expected during this period:

10th– 17th

Tan

CPI (Sep.)

(+3.3%)

10th – 17th

Bot

CPI (Sep.)

(+1.0%)

12th – 24th

Ken

GDP (Q2)

(+4.9%)

16th – 23rd

Nam

CPI (Sep.)

(+2.4%)

16th – 23rd

Ang

CPI (Sep.)

(+22.8%)

Selected future data releases and events

21st Oct

Nam

Interest Rate Announcement

3.75%

Moz

Interest Rate Announcement

13.25%

28th Oct

SA

CPI (Sep.)

(09.00)

+0.2%(+3.1%)

29th Oct

Zam

CPI (Oct.)

(+15.7%)

30th Oct

Uga

CPI (Oct.)

(+4.5%)

Ken

CPI (Oct.)

+0.0%(+4.2%)

SA

Trade Balance (Sep., SAAR)

(13.00)

38.9bn

SA

Budget Balance (Sep., SAAR)

(13.00)

-63.7bn

2nd Nov

SA

Absa Manufacturing PMI (Oct.)

(09.00)

58.3

4th Nov

Ken

Markit/Stanbic Bank PMI (Oct.)

(07.30)

56.3

5th Nov

SA

Electricity Production (Sep.)

(11.00)

(-2.4%)

Also expected during this period:

No Significant Data Released

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Capital Economics


Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World (1)

2009-18

Ave.

GDP

Inflation

2019

2020f

2021f

2022f

2019

2020f

2021f

2022f

Nigeria

0.86

4.4

2.2

-5.5

3.5

3.0

11.4

13.0

12.5

12.0

South Africa

0.57

1.5

0.2

-8.5

4.0

2.0

4.1

3.0

3.0

3.3

Ethiopia

0.17

9.7

9.0

2.5

8.0

9.0

15.7

19.0

14.0

10.0

Ghana

0.15

7.0

6.5

0.0

6.5

6.0

8.7

10.0

9.0

8.0

Angola

0.14

2.4

-0.3

-6.0

3.0

2.0

17.3

22.5

20.0

17.5

Kenya

0.14

5.6

5.6

0.5

5.5

6.5

5.2

5.0

5.0

5.0

Tanzania

0.14

6.5

5.6

1.5

6.0

6.0

3.4

4.0

5.0

4.5

Côte d’Ivoire

0.08

6.1

7.5

1.0

7.0

7.0

0.8

2.0

1.0

1.0

Uganda

0.07

5.3

6.7

1.0

6.0

5.5

2.9

4.5

5.5

6.0

Zambia

0.05

5.6

1.5

-4.5

3.5

4.0

9.1

15.0

11.5

10.0

Mozambique

0.03

3.7

2.2

1.0

5.0

4.0

2.8

3.5

4.0

4.0

Botswana

0.03

3.7

3.5

-6.5

4.0

3.5

2.8

2.0

2.5

3.0

Rwanda

0.02

7.2

9.4

-2.5

10.0

9.0

2.4

8.0

5.5

5.0

Mauritius

0.02

3.7

3.5

-10.0

6.0

4.5

0.4

2.5

3.0

3.5

Namibia

0.02

3.4

-1.4

-5.5

4.0

3.0

3.7

2.5

3.5

3.5

Sub-Saharan Africa

2.5

4.2

2.9

-4.1

4.7

4.1

8.4

9.5

8.8

8.1

Sources: Refinitiv, National Sources, Capital Economics. (1) % of GDP, 2019, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest

(9th Oct.)

Last Change

Next Change

Forecasts

End

2020

End
2021

Nigeria

MPR

11.50

Down 100bp (Sep. ’20)

Down 100bp (Jan. ’21)

11.50

10.00

South Africa

Repo Rate

3.50

Down 25bp (Jul. ’20)

Up 25bp (Q1 ’22)

3.50

3.50

Angola

BNA Rate

15.50

Down 25bp (May ’19)

Down 75bp (Q3 ’21)

15.50

14.00

Kenya

Central Bank Rate

7.00

Down 25bp (Apr. ’20)

None on horizon

7.00

7.00

Ghana

Policy Rate

14.50

Down 150bp (Mar. ‘20)

Down 100bp (Q2 ’21)

14.50

13.50

Uganda

Central Bank Rate

7.00

Down 100bp (Jun. ’20)

None on horizon

7.00

7.00

Sources: National Sources, Capital Economics

Table 3: Key Market Forecasts

Forecasts

Forecasts

Currency

Latest
(9th Oct.)

End

2020

End

2021

Stock Market

Latest

(9th Oct.)

End

2020

End
2021

Nigeria

NGN (Official)

381

400

400

NGSE

28,415

25,500

30,000

NGN (Nafex)

386

450

450

South Africa

ZAR

16.4

16.0

16.5

JALSH

55,172

59,425

71,300

Angola

AOA

639

625

625

n/a

Kenya

KES

109

110

115

NSE 20

1,837

2,300

2,700

Ghana

GHS

5.8

6.0

6.1

GSECI

1,863

2,000

2,300

Uganda

UGX

3,695

3,900

4,000

UGSE

1,341

1,600

1,800

Sources: Refinitiv, Capital Economics


Virág Fórizs, Africa Economist, virag.forizs@capitaleconomics.com