Nigeria’s economy expanded at the fastest rate this year in the third quarter, but the country’s fiscal situation has deteriorated with the further depletion of the rainy day oil savings account.
Gross domestic product growth in Africa’s second-largest economy rose to 6.8 per cent on an annual basis between July and September, compared with 6.18 per cent in the previous quarter. The National Bureau of Statistics attributed the increase to good performances in the agriculture, hotels, construction and telecoms sectors. Oil production, which dropped to a four-year low of 1.9m barrels a day in June because of crude theft and maintenance issues, recovered slightly to 2m b/d in September, according to the International Energy Agency.
The strong growth is in line with the 7 per cent average achieved by Nigeria for a decade and is a reminder of why the country of 170m people is seen by many investors as one of the most attractive frontier markets. Unlike some other emerging economies, the currency is stable, and inflation fell to a five-year low of 7.8 per cent in October.
At the same time, there are increasing concerns about Nigeria’s inability to save any of its oil windfall, especially with spending expected to rise ahead of the 2015 presidential election.
The government’s excess crude account is meant to accumulate oil revenues above a benchmark price agreed in the budget, currently $79 a barrel. Although the average price for Nigeria’s crude has been above $100 this year, the ECA balance has fallen to $3.6bn, from $9bn in December, mainly because of the lower-than-budgeted oil production.
Further draw downs are expected next year in the run-up to the 2015 election, where President Goodluck Jonathan is expected to face a strong challenge from a recently united opposition. Political success is usually closely correlated with patronage, and before the 2011 election the oil savings account was run down from $20bn to just $300m.
“The excess crude account is likely to go to nearly zero again,” said Samir Gadio, emerging market strategist at Standard Bank. “That’s a concern because it shows that the fiscal break-even is closer to the current, high oil price and not the benchmark in the budget. If an oil price shock happens, Nigeria will not be able to withstand it.”
If an oil price shock happens, Nigeria will not be able to withstand it
– Samir Gadio, Standard Bank
Compared with many western countries, Nigeria’s debt-to-GDP ratio is still relatively low, at around 20 per cent. But pressure to borrow more is likely to rise in the run-up to the 2015 vote a trend that international bond holders, who have increased exposure to Nigeria is recent years, will be watching closely.
Finance minister Ngozi Okonjo-Iweala has pledged to keep spending in check. The 2014 budget, which is expected to be presented to legislators by Mr Jonathan on Tuesday, proposes spending of N4.5tn ($28.4bn), down from N5tn this year. That would give a modest deficit of 1.9 per cent of GDP. Most of the cuts in the 2014 budget are to capital expenditure.
But as occurs every year, and especially before an election, legislators will demand changes before they pass the budget. The proposed oil price benchmark of $74 a barrel is expected to rise to closer to $80, to ensure more cash is available for spending at national and state level. Bismarck Rewane, chief executive of Financial Derivatives, a Lagos-based consultancy, said that lawmakers would push for higher capital spending so they can start voter-pleasing projects in their constituencies ahead of the 2015 poll. He also expects recurrent expenditure to rise, with an increase in debt servicing costs, security spending, and “payments to ghost workers and all those sorts of things”.
