Coronation Merchant Bank sees no let up in Nigeria’s fiscal woes in 2023 with federal revenues set to underperform for what would be an eight straight year.
“We expect revenue underperformance in 2023, therefore continuous reliance on ways and means is likely and would impact interest expense,” Coronation Merchant Bank said in its Economic Review and 2023 Outlook.
Nigeria is hoping to rake in N9.73 trillion in revenues this year to fund the budget worth N21.83 trillion. That leaves a deficit of about N11 trillion, almost 5 percent of GDP.
The government also plans to borrow N7.4 trillion from domestic sources and N1.8 trillion from foreign sources this year, according to the 2023 budget documents. “This could result in an increase in the debt service-to-revenue ratio, which stood at 81 percent in November 2022,” the report said.
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The implication of low revenues and high debt servicing costs is that Africa’s biggest economy is unlikely to hit the brakes on its recourse to the central bank for loans to fund the federal budget in 2023.
With less than four days to the 2023 general election, Nigeria’s next president is expected to tackle slowing economic growth, control inflation, reverse declining foreign reserves, and transform the country’s fiscal and current account deficits into a surplus.
Aurelien Mali, the vice president and senior credit officer, Moody’s Investors Service predicted the winner of Nigeria’s next president would take time to implement structural reforms.
“We do not expect that subsidy will be phased out at the end of H1 because of the consequences in terms of inflationary pressure in the country, it is expected to happen only gradually,” Mali said at the outlook event.
Concerning interest rate hikes, in their base case scenario Coronation Merchant Bank predicted two rate hikes (150bps in total) by the Central Bank of Nigeria (CBN) resulting in a Monetary Policy Rate of 19 percent in 2023.
“We assume the committee would revert to a wait-and-see approach to observe the impact of the rate hikes on incoming macroeconomic data,” Coronation Merchant Bank said.
In its last meeting, the MPC of the CBN increased the MPR, also known as the benchmark interest rate, five times from 11.5 percent in May to 17.5 percent in January in a bid to curb inflation.
The outlook report said the MPC will maintain the asymmetric corridor of +100/-700bp around the MPR and the liquidity ratio at 30percent.
“We see the CBN/MPC maintaining its posture with liquidity mop-up in 2023. Rate hikes by the MPC/CBN combined with increased deficit financing translate into upticks in market interest rates,” Coronation Merchant Bank said.
Last month, Nigeria got its lowest credit rating since 2006, courtesy of Moody’s Investors Service, which has downgraded the country’s foreign debt for the second time in just over three months.
“We have a stable outlook for Nigeria because we believe Moody rating is resilient to some of the implementation of structural reforms, knowing that the credit profile is going to deteriorate,” Mali said.
Alex Sienaert, lead economist, Nigeria, World Bank said, “the fairly low growth and fairly monetary tightening would make it hard for Nigeria to get the financing it needs,” adding “that there is a need for Nigeria to invest in better coordination across key policy institutions in Nigeria.”
Chinwe Egwim, the chief economist at Coronation Merchant Bank also raised concerns about policy continuity post-election, as well as an expected lull in economic activity on the back of the transition phase.
“Nigeria’s GDP growth is expected to maintain its growth trajectory but at a relatively slower pace in 2023,” Egwim said.
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