Budget: Initial Thoughts

Finance Minister Ngozi Ikonjo-Iweala presented the 2014 federal budget on December 19 2013. In a break from tradition, President Goodluck Jonathan delegated the task to his finance minister rather than doing it himself - only the second time since the onset of civilian rule in 1999 that a sitting president has not delivered the budget. The other occasion was in 2010 when illness prevented the late President Umaru Yar'Adua from undertaking the task. Although no official reason has been given for Jonathan's absence, the fact it coincided with the defection of 37 legislators from Jonathan's ruling People's Democratic Party (PDP) to the opposition All Progressive Congress (APC) has raised suspicions that the president was avoiding what was likely to be a hostile House. The defections mean that the PDP has lost its majority in the lower House although it retains control of the Senate.

Looking at the budget itself, the authorities are planning to spend NGN4.6trn (US$28.8bn) over the course of the year, NGN100bn lower than the amount laid out in the 2013 budget. NGN3.37trn of this will be financed by budgeted revenue with the remaining shortfall to be covered by the issuance of NGN571bn in new debt, according to the government's plans. Below are our initial thoughts on the key assumptions underpinning the budget:

Cautious growth forecast: The budget is underpinned by the assumption that the economy will grow by 6.8%, below our forecast for growth of 7.0%. We believe that the crucial agriculture sector will provide more of a boost to headline growth than the authorities are anticipating following the implantation of key reforms.

Budget: Initial Thoughts

Finance Minister Ngozi Ikonjo-Iweala presented the 2014 federal budget on December 19 2013. In a break from tradition, President Goodluck Jonathan delegated the task to his finance minister rather than doing it himself - only the second time since the onset of civilian rule in 1999 that a sitting president has not delivered the budget. The other occasion was in 2010 when illness prevented the late President Umaru Yar'Adua from undertaking the task. Although no official reason has been given for Jonathan's absence, the fact it coincided with the defection of 37 legislators from Jonathan's ruling People's Democratic Party (PDP) to the opposition All Progressive Congress (APC) has raised suspicions that the president was avoiding what was likely to be a hostile House. The defections mean that the PDP has lost its majority in the lower House although it retains control of the Senate.

Looking at the budget itself, the authorities are planning to spend NGN4.6trn (US$28.8bn) over the course of the year, NGN100bn lower than the amount laid out in the 2013 budget. NGN3.37trn of this will be financed by budgeted revenue with the remaining shortfall to be covered by the issuance of NGN571bn in new debt, according to the government's plans. Below are our initial thoughts on the key assumptions underpinning the budget:

Cautious growth forecast: The budget is underpinned by the assumption that the economy will grow by 6.8%, below our forecast for growth of 7.0%. We believe that the crucial agriculture sector will provide more of a boost to headline growth than the authorities are anticipating following the implantation of key reforms.

Revenues too optimistic: Even with our relative optimism on the outlook for growth, we do not believe that the authorities will collect more than the NGN3.37trn that the budget envisages; we forecast that the authorities will collect NGN3.27trn. The main reason for this is that production from the crucial oil sector, which accounts for around 80% of total revenues, is likely to remain below the 2.39bn barrels per day (bpd) that the budget assumes owing to ongoing security issues. Indeed, production in 2013 has averaged 1.95bn bpd according to data from the United States Energy Information Administration and we see little signs that the security situation will improve to the point where production will increase towards the authorities' target.

Oil Price: The shortfall in production will be offset to some extent by the fact that the benchmark oil price has been set at US$77.5/bbl, lower than our Oil and Gas team's Brent crude 2014 forecast of US$102.8/bbl. The budgeted oil price has been a source of contention and was the reason that the budget's delivery was delayed by a month. Indeed, the executive branch of the government wanted a figure of US$74/bbl, which would have meant a tighter budget and higher inflows to the excess crude account. The House of Representatives were keener on US$79/bbl which would have given the National Assembly and the States more to spend.

Naira Stability Expected: The budget assumes an exchange rate of NGN160.00/US$, the same level as in the 2013 budget and around where the currency was trading at the time of the budget delivery. We believe that the authorities have the resources to support the currency at its current level for the time being. However, the risks are to the downside and stem from the possibility that oil production comes in lower than we currently anticipate and/or if spending - both official and unofficial - increases dramatically as the 2015 election approach.

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