As at 1.19 pm when I started writing this article for Monday publication, Brent Crude oil was trading at US$53.07 per barrel. A few seconds later, it dropped to US$52.99 and rebounded almost immediately to US$53.02. That is how volatile crude oil prices looks set to play in 2019 after falling almost 40 percent from an October high of over US$80 per barrel.
This volatility is not good news when you consider that the 2019 budget has been pegged on a benchmark oil price of US$60 per barrel. It is looking increasingly likely that the price would not be achievable in 2019. The biggest risk against a higher oil price is fear of the United States falling into a recession. Years of consistent post-financial crisis economic growth looks to be slowing down. The stock market is almost trading in a bearish territory after what has been described as one of the longest bullish runs in US history.
But even if the US does not fall into a recession, high oil production from the US is another reason while oil prices could fall far below our budget expectations in 2019. US production has risen above the 11 million barrels per day mark, making it the highest oil producing country in the world. Shale producers in the US are said to be able to remain profitable with oil price at US$50 per barrel, whereas OPEC nations like Saudi Arabia need oil prices to be as high as US$90 to break oven on their budget.
US, whose Shale crude could easily substitute Nigeria’s light crude grades, can therefore afford to undercut the oil market on price. It also has the volumes to do so. The outlook for oil prices is therefore not looking good and Nigeria risks seeing crude oil prices trading below its budget benchmark of US$60 for most of 2019.
But besides the price, Nigeria’s projected volumes are also at risk in 2019. Based on the December OPEC meeting which agreed to cut oil production by about 800,000 barrels per day, Nigeria production has been pegged at about 1.7 million barrels per day, which is already 600,000 barrels per day below the 2019 budget benchmark of 2.3 million barrels per day. This raises the real prospect that the country could be faced with lower production and lower oil prices in 2019.
The federal government is projecting to rake in on oil revenues of N3.7 trillion in 2019, which would account for approximately 53 percent of the total revenues of N6.97 trillion expected to fund the 2018 budget of N8.8 trillion. With oil prices and oil production expected to underperform, the oil revenues target is going to be off the mark by a wide margin, like it has always been in the past three years. If oil prices remain below US$60 per barrel, the federal government would be lucky to hit N2 trillion in oil revenues in 2019.
This would largely be in line with the way the government’s oil revenues performed in 2018. As at the end of September 2018, the federal government’s oil revenues stood at N1.51 trillion, 101 percent higher when compared to the comparable period of 2017 but just about half of the projected N2.9 trillion oil revenue target for 2018.
The expectation is that oil revenues would record almost a trillion-naira shortfall in 2018. As at September, the total federal government revenues of N2.84 trillion was 40 percent higher when compared with the same period of 2018 but 53 percent below its target revenues for the period. This is despite the fact that oil prices have largely been above US$60 per barrel for most of 2018. In the third quarter of 2018, average oil price was US$74, a price which now looks very unlikely in 2019.
Non-oil revenues will not fill any hole left by oil revenues falling below expectations. Growth in non-oil revenues have remained slow despite government’s efforts. In 2018, the highest growth in non-oil revenues was in company income tax, which went up 23 percent to N500.37 billion as at third quarter. Customs collections was up only 11 percent and Value Added Tax by only five percent. In an economy struggling with growth, slow growth in non-oil revenues is only expected.
Simply put, the federal government revenue projection of N6.9 trillion is not going to be met in 2019. Revenues are likely to be anywhere between N3.0 trillion and N4.0 trillion, which is not much different from where the government revenues have been in the last three years. Best case revenue projection for 2018 is N3.5 trillion, with the government likely to incur a potential deficit of N2.5 trillion, assuming it is able to curtail expenditure to N6 trillion instead of the N9.1 trillion approved expenditure plan for 2018. Faced with a significant revenue challenge, I expect that the government will continue to cut back on planned expenditure approved in the 2018 budget with capital expenditure most likely to take the hit.
But in 2019, the federal government is likely to have less flexibility in cutting back on its planned expenditure. The planned minimum wage increase will push the federal government’s non-debt recurrent expenditure to N4.7 trillion, almost N1.7 trillion less than the best case revenue projection scenario. This means that the federal government will have to increase borrowing to part-pay salaries and overheads, as well as cover interest payments on its rising debt profile and capital expenditure with 100 percent borrowed money.
The increased borrowing from the federal government would push up interest rates, make banks richer and businesses poorer. Faced with a potential rise in the debt burden, I expect the government to push for the reforms that it has been reluctant to push for in the past. Price modulation for petroleum prices will likely come back into play leading to an increase in the cost of petrol. The long delayed tariff increase in power sector will also be allowed to come into effect in a bid to open up the power sector to new investments and improve supply and reduce the dependence of businesses on alternative power supplies. The federal government may also finally tinker with VAT and adopt a staggered rate that will see VAT on certain goods go up in 2019 or in early 2020. Cost of living is about going up in 2019.
Still in a bid to boost revenues, the federal government will also get serious about privatisation and concessioning of some of its assets and finally move to sell part of its stakes in the JVs, a proposal that has been on the drawing board in the last three years. The federal government would also be more open to the concessioning or outright sale of the refineries, which may come too late since the Dangote refinery would already be coming on stream.
But perhaps, what would hit Nigerians is a potential devaluation of the Naira, a risk with a high probability in 2019. Even though external reserves look healthy at US$43.3 billion as at December 24, 2018, if oil prices remain where they are now for a longer period, pressure could come on the external reserves as the 2019 elections approaches and the naira could give way.
The extent of a potential naira devaluation will largely depend on how fast portfolio investors return to the Nigerian economy after the 2019 national elections, which will also largely depend on how quickly any government that emerges set out its economic agenda. If a clear economic agenda is set quickly after the elections, it could actually boost the value of the naira but if uncertainty drags post elections, then the naira could suffer. Happy New Year!
NB.
This is my last article as editor of BusinessDay. While I am moving on to a new challenge, BusinessDay will remain a great source of intelligence and insightful analysis.
Anthony Osae-Brown
