2021 Budget of Economic Recovery and Resilience
President Muhammadu Buhari presented the 2021 proposed budget, titled the Budget of Economic Recovery and Resilience, at the Joint Session of the National Assembly in Abuja on 8th October 2020. The major assumptions of the 2021 proposed budget include:
Benchmark oil price of $40 per barrelDaily oil production estimate of 1.86 million barrelsExchange rate of N379/$GDP growth projection of 3.0% and an inflation rate of 11.95>#/span###
The federal government is proposing a 21.0% increase in targeted aggregate expenditure to N13.08 trillion in 2021. The increment mostly reflects increased allocations towards personnel costs, debt service and capital expenditure.
The government expects to raise total revenue of N7.89 trillion in 2021. This revenue projection comprises expected inflows from grants & aids (N354.85 billion) and funds from several government-owned enterprises.According to the document, the oil price and production assumptions are likely to result in oil revenue of 2.01 trillion (25.5% of total). Elsewhere, the government is also aiming to raise N1.49 trillion (18.9% of total) in non-oil revenue in the coming year. The remainder may likely be derived from independent revenue sources, special account transfers and signature bonuses and renewals.
To the government, revenue shortfall should approximate N5.2 trillion (3.46% of GDP) in 2021. The FGN plans to finance the deficit with flows from new borrowings (N4.28 trillion), privatisation proceeds (N205.15 billion), and drawdowns from multilateral and bilateral loans secured for specific projects and programmes (N709.69 billion).
In our view, given its ever-widening budget deficit and concurrent FX needs, Nigeria may be tempted to revisit the Eurobond market next year after having shelved plans to raise $3 billion in 2020 following the COVID-19 outbreak. However, a return to the international debt market may, ultimately, depend on external financing conditions. Even though weaker oil prices and domestic FX liquidity issues are concerning, the Fed’s long-term dovish posture and relative stability in the Eurobond market suggest that a few providers of long-term capital may still be up for some risks. That said, investors are likely to demand a premium to pre-pandemic levels of c.7.5%, on duration, for a potential Eurobond issuanceThe oil price and production assumptions appear reasonably conservative and in line with emerging realities. However, we believe the exchange rate and inflation targets are likely to be unattainable. On the FX front, growing external sector pressures (as travel and trade activities normalise) amid protracted slowdown in the oil economy could cascade to another naira repricing by 2021, while the inflation rate could be nudged higher by increased electricity tariff and volatile fuel prices.