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FG, States may increase borrowing in 2015

By on December 11, 2014

The revenue growth challenges facing the country as a result of the dwindling price of crude oil imply that governments’ borrowing may increase next year.
Renaissance Capital (RenCap), a financial advisory firm revealed this in report obtained by THISDAY.
It also predicted that 2015 may turn out to be a tougher year for consumers.

The report further revealed that two out of four of its variables that explain consumer confidence in its regression model had been adversely impacted by recent developments in the economy.
The Central Bank of Nigeria (CBN) recently hiked interest rates and contractionary fiscal policy suggests that the prospects of wage increases for civil servants, in the short term, have dimmed.
In addition, the Organisation of Petroleum Exporting Countries (OPEC) recently opted not to cut output, confirming low prices are here to stay.
The report argued that the naira remains at significant risk, “which implies the probability of further tightening is high.”
“Three months ago, the probability of the oil price falling below $80/bl was low. Today, we are adapting to the fact that this may be the new normal, following OPEC’s (which represents 40per cent of the world’s production) decision to maintain current production levels in response to lower oil prices.
“We think there is scope for the crude oil price to drop below $70/bl in the near term. Lower oil prices may result in a further slowdown in forex inflows, challenging the central bank’s ability to defend the naira,” RenCap forecast.
To this end, it pointed out that given the downside risk to revenue and the near-depletion of the excess crude account, the government may have little option but to remove the fuel subsidy.
“This means savings of $2.5 billion or four per cent of the 2014 consolidated government budget. We think the current low public debt levels of 11 to 12 per cent of GDP and revenue growth challenges imply government borrowing may increase in 2015, leading to an increase in yields in 2015, after being depressed in 2014,” it added.
According to the report, oil price is likely to settle around the current forward price of $80/bl in 2015.
“At an oil price of $80/bl Nigeria’s current account (C/A) would become negative for the first time in 12 years, from our revised 2014 estimate of 2.2 per cent of GDP 2014 estimate (versus 4.3 per cent previously).
“While a weaker naira would possibly slow demand for imports and the lower oil price reduce the cost of importing refined oil (20per cent of imports), we do not think this would be sufficient to keep the C/A positive, implying that forex reserves may have to be drawn down to finance Nigeria’s balance of payments (BOP).
“This is negative for the naira, which we see at N197/$1 at the end of 2015 versus N182/$1 at the end of 2014,” it added.
Furthermore, it anticipated that demand in the cement industry would soften as capital expenditure slows on the back of restrictive fiscal policy and a higher interest rate environment.