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Crude Oil Price Drops, Threatens Naira, 2017 Budget

Nigeria’s excess crude oil revenue has dropped by five per cent as oil prices fell to $49.26 per barrel yesterday, posing fresh threat to implementation of the yet unsigned 2017 budget and the exchange rate of the naira.
Specifically, the nation generated about $114 million from the export of about two million barrels per day in May, 2017 when prices stood at $57 per barrel. But the revenue dropped to $108 million yesterday when oil prices crashed from over $50 per barrel to $49.29 in the global market. This development translates to reduction in accretion to the nation’s external reserves, hence reduction in dollar supplies, which undermines the stability of the Naira exchange rate. Though the Naira appreciated to N375 per dollar in May, external reserves however fell by $535 million during the month to $30.32 billion. The fall in oil prices and excess crude oil revenue also poses a fresh threat to the implementation of the Federal Government’s N7.28 trillion 2017 budget which was based on $44.5 per barrel reference price. Managing Director/CEO of Cowry Assets Management Limited, Mr. Johnson Chukwu indicated in a telephone interview that the market situation was fuelled by the decision of the United States not to be part of the Paris Club on climate change. He said that this gives the impression that the United States would flood the market with commercial shale oil, thus worsening the present state of the market. In practice, Chukwu stated that the United States will not be able do much damage to the market, as there is a limit to which shale producers can go in terms of increasing supply. Chairman of International Energy Services Limited, Dr. Diran Fawibe, a close watcher of the volatile market, said in a telephone interview that the development constitutes fresh threat to foreign exchange generation and budget implementation. According to him, the nation that currently produces about 2.2 million bpd following the coming back on stream of Shell Petroleum Development Company’s Forcados with the capacity to produce about 200,000 bpd may experience a setback should prices slide further. He indicated that the initial leap in prices to $54 per barrel before the recent meeting of the Organisation of Petroleum Exporting Countries, OPEC was based on the immediate market response to expected possible decision of the organisation. His words: “What we may expect in the medium term is price hovering around $50 per barrel, depending on market perception of oil supplies to world oil market.” “If the prices hover around $50-54 dollars per barrel, there is no reason why Nigeria’s 2017 budget should suffer. However, much will depend on the discipline in maintaining fiscal responsibility and due process with regard to the budget implementation,” he added. However, the demand for oil may rise slightly this year as a result of increased economic growth in some nations. OPEC predicted in its May, 2017 oil market report that, “the forecast for global economic growth remains at 3.3% in 2017, compared to growth in 2016 of 3.0%. The recent growth dynamic in the global economy has been confirmed with the exception of the US, which is still expected to rebound in the remainder of the year.” “While US growth remains at 2.2%, Euro-zone growth in 2017 was revised to 1.7% from 1.6%. Japan’s 2017 growth forecast remains at 1.2%. China’s 2017 growth was also revised higher to 6.5% from 6.3%, while India’s forecast remains at 7.0%. Russia’s and Brazil’s 2017 growth forecasts remain unchanged at 1.2% and 0.5%, respectively.” “World oil demand in 2016 was revised higher by 65 tb/d to reflect the most recent data. For 2017, oil demand growth is anticipated to be around 1.27 mb/d unchanged from the previous report with total oil demand expected at 96.38 mb/d. Non-OECD will continue to lead growth at 1.04 mb/d, while OECD continues to grow albeit at a reduced pace of 0.23 mb/d. World Oil Supply Non-OPEC oil supply in 2016 was revised marginally lower due to a downward adjustment in Russian oil supply in 4Q16 to now show a contraction of 0.71 mb/d to average 57.3 mb/d,” it added. President, Muhammadu Buhari had stated while presenting the budget to the National Assembly that the 2017 Budget was based on a benchmark crude oil price of US$42.5 per barrel; an oil production estimate of 2.2 million barrels per day; and an average exchange rate of N305 to the US dollar. He had said that based on these assumptions, aggregate revenue available to fund the federal budget is N4.94 trillion. Buhari had noted that this is 28per cent higher than 2016 full year projections. Oil is projected to contribute N1.985 trillion of this amount. He had stated that non-oil revenues, largely comprising Companies Income Tax, Value Added Tax, Customs and Excise duties, and Federation Account levies are estimated to contribute N1.373 trillion. “We have set a more realistic projection of N807.57 billion for Independent Revenues, while we have projected receipts of N565.1 billion from various Recoveries. Other revenue sources, including mining, amount to N210.9billion. With regard to expenditure, we have proposed a budget size of N7.298trillion which is a nominal 20.4% increase over 2016 estimates. 30.7% of this expenditure will be capital in line with our determination to reflate and pull the economy out of recession as quickly as possible.” “This fiscal plan will result in a deficit of N2.36 trillion for 2017 which is about 2.18% of GDP. The deficit will be financed mainly by borrowing which is projected to be about N2.32 trillion. Our intention is to source N1.067 trillion or about 46% of this borrowing from external sources while, N1.254 trillion will be borrowed from the domestic market.” “The size of the 2017 capital budget of N2.24 trillion (inclusive of capital in Statutory Transfers), or 30.7% of the total budget, reflects our determination to spur economic growth. These capital provisions are targeted at priority sectors and projects. Specifically, we have maintained substantially higher allocations for infrastructural projects which will have a multiplier effect on productivity, employment and also promote private sector investments into the country,” he had added. FG’s debt stock hits N19.16trn, pays N474bn interest on domestic debt Meanwhile, in apparent reflection of the increasing dependence of the three tiers of government on borrowing to finance their fiscal activities, Nigeria’s total debt rose by 6.4 per cent to 19.16 trillion in the first quarter of the year from N18 trillion in 2016. This is even as the Federal Government paid N474 billion as interest on its domestic debt in the first quarter of the year. The Debt Management Office, DMO, disclosed this, yesterday, in its first quarter report of the nation’s debt stock. The report showed that the total foreign debt of the federal government and the 36 states rose to $13.8 billion in the first quarter from $11.41 billion in 2016, indicating increase of $2.39 billion or 21 per cent. The domestic debt of the Federal Government rose slightly to N11.97 trillion in March from N11.06 trillion in December 2016, indicating increase of N910 billion. According to the DMO, the domestic debt of the federal government comprises N8.17 trillion worth of FGN Bonds, representing 68.31 per cent of the total debt; N3.6 trillion worth of Treasury Bills, representing 30 per cent of the total debt; N190.99 billion worth of Nigeria Treasury Bonds, representing 1.6 per cent of the total debt, and N2.1 billion worth of FGN Savings Bonds, representing 0.02 per cent. The DMO report also revealed that the federal government paid N474 billion as interest on its N11.97 trillion domestic debt from January to March. This implies average monthly interest payment of N158 billion. A breakdown of the interest payment during the three months revealed that the federal government paid N102 billion interest on its Treasury bill debt, while it paid N346.5 billion interest on its FGN Bond debts. On the Treasury Bond debts, the federal government paid interest of N2.17 billion and also repaid the principal of N25 billion during the period.
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