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www.pwc.com NIGERIA Economic Update Strictly Private and Confidential February 2017 Contents Contents NIGERIA PwC 1 PwC -World in 2050 3 2 Global Outlook 9 3 Nigeria: Economic Context 15 4 2017 budget in focus 25 5 Sector Outlook 31 6 Economic Outlook 36 Confidential Information for the sole benefit and use of PwC’s Client. February 2017 2 1 PwC -World in 2050 Contents PwC -World in 2050 NIGERIA 3 1 PwC -World in 2050 Executive summary: key findings • We project the world economy to grow at an average of just over 2.5% per annum in terms of real GDP per capita at purchasing power parity (PPP) in the period 2016 – 50, doubling in size by 2042. • But we expect a slowdown in global growth after 2020, as the rate of expansion in China and some other major emerging economies moderates to a more sustainable long-term rate, and as working age population growth slows in many large economies. • The global economic power shift away from the established advanced economies in North America, Western Europe and Japan will continue over the next 34 years. India is projected to become the second largest economy in the world by 2038 in PPP terms (third in MER terms) and China is expected to be the world’s largest economy in both PPP and MER terms by 2030. • Emerging economies such as Mexico and Indonesia are projected to be larger than the UK and France by 2030 (in PPP terms) while Vietnam could become larger than Italy and Canada. • Vietnam is projected to record the highest annual average real GDP per capita growth over the period 2016 – 2050 at 4.5%, while Bangladesh and India are forecast to achieve growth levels of around 4%. • Growth in other emerging economies such as Nigeria, Pakistan and Egypt is largely driven by demographic change as they are projected to experience strong increases in total population and working age population between 2016 and 2050. • But for the majority of economies in our analysis, annual working age population growth is slower than annual total population growth and this acts as a drag on GDP per capita. • While the emerging economies are projected to experience the highest real GDP growth rates, they still lag well behind the G7 in terms of GDP per capita levels in 2050. Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 4 1 PwC -World in 2050 2016: Average total population growth vs. average working age population growth (2016 - 2050) Nigeria, Egypt, Pakistan and the Philippines are projected to have the highest average annual population and working age population growth rates Average total population growth vs. average working age population growth (2016 2050) 3.0% 2.5% Growth in Nigeria, Pakistan and Egypt is largely driven by demographic change as they are projected to experience strong growth in total population and working age population between 2016 and 2050. 2.0% The annual working age population growth rate is lower than the annual total population growth rate across the majority of economies in our analysis (25/32). This acts as a drag on economic growth. 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Average Working Age Pop Growth p.a % Average Total Pop Growth p.a % Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 5 1 PwC -World in 2050 2016: GDP at PPP rankings We project that India could have the potential to overtake the US as the world’s second largest economy by 2050 in PPP terms GDP PPP GDP MER rankings rankings 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 2 1 7 3 4 12 9 16 5 6 15 8 11 19 14 10 18 23 13 24 25 22 21 28 20 17 27 26 29 30 31 32 2016 rankings 2030 rankings Country GDP at PPP GDP at MER Country China United States India Japan Germany Russia Brazil Indonesia United Kingdom France Mexico Italy South Korea Saudi Arabia Spain Canada Turkey Iran Australia Thailand Egypt Nigeria Poland Pakistan Argentina Netherlands Malaysia Philippines South Africa Colombia Bangladesh Vietnam 21269 18562 8721 4932 3979 3745 3135 3028 2788 2737 2307 2221 1929 1731 1690 1674 1670 1459 1189 1161 1105 1089 1052 988 879 866 864 802 736 690 628 595 11392 18562 2251 4730 3495 1268 1770 941 2650 2488 1064 1852 1404 638 1252 1532 736 412 1257 391 340 415 467 284 542 770 303 312 280 274 227 200 China United States India Japan Indonesia Russia Germany Brazil Mexico United Kingdom France Saudi Arabia South Korea Turkey Italy Iran Spain Canada Egypt Pakistan Nigeria Thailand Australia Philippines Malaysia Poland Argentina Bangladesh Vietnam South Africa Colombia Netherlands 2050 rankings Projected GDP at Projected GDP at PPP MER 38008 23475 19511 5606 5424 4736 4707 4439 3661 3638 3377 2755 2651 2625 2541 2354 2159 2141 2049 1868 1794 1732 1663 1615 1506 1505 1342 1324 1303 1148 1111 1080 26499 23475 7841 5468 2449 2111 4347 2969 2143 3530 3186 1407 2278 1511 2278 1005 1863 2030 908 776 875 823 1716 871 744 1015 967 668 624 557 586 1007 Country Projected GDP at Projected GDP at PPP MER China India United States Indonesia Brazil Russia Mexico Japan Germany United Kingdom France Saudi Arabia Turkey Nigeria Egypt Pakistan Iran South Korea Philippines Vietnam Italy Canada Bangladesh Malaysia Thailand Spain South Africa Australia Argentina Poland Colombia Netherlands 58499 44128 34102 10502 7540 7131 6863 6779 6138 5369 4705 4694 4542 4348 4333 4236 3900 3539 3334 3176 3115 3100 3064 2815 2782 2732 2570 2564 2365 2103 2074 1496 49853 28021 34102 7275 6532 5127 5563 6779 6138 5369 4705 3495 3622 3282 2990 2831 2586 3539 2536 2280 3115 3100 2263 2054 1995 2732 1939 2564 2103 2103 1591 1496 Note: GDP at PPP is in constant 2016 international $, GDP MER is in US$ NIGERIA PwC Source PwC Analysis Confidential Information for the sole benefit and use of PwC’s Client. February 2017 6 1 PwC -World in 2050 World in 2050 Five ways in which Nigeria can support inclusive growth (1/2) Between now and 2050, over half of global population growth will occur in Africa so that there will be 2.4 billion Africans in 2050, more than three times Europe’s population. Nigeria’s population alone is estimated to be around 400 million in 2050, equivalent to around 56% of Europe’s population, making it the third most populous country in the world. Hence, the challenge over the next few years is ensuring output growth keeps pace with population growth while the country transitions from an oil economy to a nonoil economy. Source PwC Analysis NIGERIA PwC Issues Recommended Actions Improving tax collection Nigeria is a low-taxed economy, the second lowest in Africa and the fourth lowest in the world. Excluding oil and gas revenues, tax receipts are estimated at just 3% of GDP. If these could be increased to the Sub-Saharan African economies’ average of 18% of GDP, Nigeria could potentially raise its tax revenues to around $104 billion, the equivalent of Morocco’s total GDP in 2013 Higher tax revenues would reduce government borrowing and encourage financial institutions to offer fund at lower interest rates, thereby boosting the real economy Economic diversification Nigeria’s potential advantages for future growth include a large consumer market, a strategic geographic location as a hub for Africa, and a young and entrepreneurial population The first step in harnessing this opportunity requires deliberate efforts to improve value-adding activity in the non-oil economy, particularly in agriculture and the services sectors Corruption If Nigeria reduces corruption, there is a significant opportunity to boost GDP levels. For example, if corruption in Nigeria could be reduced in the long-run to estimated levels in Malaysia, we estimate that annual GDP could rise by over $500 billion by 2030 Deliberate efforts to reduce corruption will complement the Confidential Information for Nigerian the sole benefit and use of PwC’s Client. drive government’s diversification February 2017 7 1 PwC -World in 2050 World in 2050 Five ways in which Nigeria can support inclusive growth (2/2) Between now and 2050, over half of global population growth will occur in Africa so that there will be 2.4 billion Africans in 2050, more than three times Europe’s population. Nigeria’s population alone is estimated to be around 400 million in 2050, equivalent to around 56% of Europe’s population, making it the third most populous country in the world. Hence, the challenge over the next few years is ensuring output growth keeps pace with population growth while the country transitions from an oil economy to a nonoil economy. Issues Recommended Actions Easing the constraints to business A weak business environment is holding back Nigeria’s economic growth potential and slowing down the pace of development Nigeria will need to particularly focus on improving electricity, simplifying the tax collection process, and improving trading across borders so as to leverage its position as the hub of West Africa Increasing labour productivity Nigeria has the advantage of a large workforce of over 70 million, but the majority are under-skilled. Average productivity of a worker in Nigeria is very low at US$3.24/hr relative to US$19.68/hr in South Africa and US$29.34/hr in Turkey Improvements in productivity will require investments to ensure a broad availability of good quality education as well as relevant vocational training to improve value-added activity across key sectors such as manufacturing and services. Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 8 2 Global Outlook Contents Global Outlook NIGERIA 9 2 Global Outlook Global growth recovery subdued by downside risks from Brexit and weaker-than-expected growth in the United States Output growth -select advanced economies World output growth 7 5.4 6 5 4 4.2 3.3 3.4 3.4 3.2 3.1 2 1 % 3.5 % 3 (1) (2) 2010 2011 2012 2013 2014 2015 2016 2017F United States Euro Area United Kingdom 2010 2011 2012 2013 2014 2015 2016 2017F Other advanced economies Source: IMF World Economic Outlook NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 10 2 Global Outlook Recovery in commodity prices and reduced concerns about China’s near term prospects provides boost to EM growth SSA real GDP growth Output growth - Emerging and Developing economies 7 8 6 7 5 6 4 4 3 % 5 3 2 2 1 1 - (1) (1) 2014 2015 2016 Emerging and Developing Asia 2017F (2) 2014 2015 2016 Middle East and North Africa Oil exporting countries Sub-saharan Africa Non resource intensive countries Latin America Other resource intensive countries 2017F Source: IMF World Economic Outlook NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 11 2 Global Outlook Financial Crisis Watch G7 Government Gross Debt-to-GDP Ratios 2001, 2007 & 2015 250% 200% 150% 100% 50% 0% 2001 2007 2015 Source: IMF World Economic Outlook NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 12 2 Global Outlook Are we going to see the next Financial Crisis – soon? Negative interest rate securities by country Source: IMF World Economic Outlook NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 13 2 Global Outlook Five critical issues to consider in 2017 Brexit & European instability 1 Trump’s protectionist stance 2 Fed Rate hike 3 China’s Economy & Global Trade 4 Commodity prices 5 Source: PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 14 3 Nigeria: Economic Context Contents Nigeria: Economic Context NIGERIA 15 3 Nigeria: Economic Context The Nigerian economy continues to suffer from the impact of low oil prices and significant production shortages Brent Spot Price Crude oil production 140 120 2,500 113.02 2,000 80 56.27 60 '000 bbl/day USD per bbl 100 1,500 1,000 40 500 20 Nov-16 Sep-16 Jul-16 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jan-17 Jul-15 Jan-16 May-15 Jan-15 Mar-15 - Jan-15 Jan-14 Source: NBS Report: OAGF, Appropriation Act NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 16 3 Nigeria: Economic Context The economy entered a recession for the first time in recent years, as the services, manufacturing and crude petroleum sectors declined sharply Sector Real GDP Growth Rate (%) Real GDP Growth Rate (%) 6.21 6.54 6.23 20 5.94 15 3.96 10 2016: GDP growth 2.84 impacted by 2.35 2.11 fuel and foreign exchange shortages 5 (5) (10) (15) (20) -0.36 (25) -2.06 -2.24 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 Crude Petroleum Agriculture Services Manufacturing Source: NBS Report: OAGF, Appropriation Act NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 17 3 Nigeria: Economic Context Exports and imports have declined sharply following the drop in oil production volumes and price Imports and Exports 25 22.17 22.62 21.18 20 16.61 15 12.27 12.39 USD Billion 10 10.46 10.25 7.96 9.27 7.84 5 (5) (10) 9.25 (15) (20) 15.71 15.03 17.74 13.58 12.62 Q1 2015 Q2 2015 14.58 12.31 8.46 11.60 18.52 (25) Q1 2014 Q2 2014 Q3 2014 Q4 2014 Imports (CIF) Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Exports (FOB) Source: Central Bank of Nigeria; PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 18 3 Nigeria: Economic Context Administrative controls on forex and the uncertainty in the business environment have resulted in a reduction in FDI and FPI Sources of FX inflows 100 95 94 90 83 80 US$'Billion 70 60 50 46 40 33 30 21 21 20 10 17 7 21 20 19 14 6 5 5 3 3 1 2 2012 2013 FDI 2014 FPI REMITTANCES 2015 2016 EXPORTS Source: Central Bank of Nigeria, NBS; PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 19 3 Nigeria: Economic Context Stocks fall sharply as impact of lower oil receipts weighs on market sentiment; the financial services sector has been severely hit 140 Market performance in tandem with oil price performance R2= 94% 100 Consumer Goods vs. Financial Services vs. Oil & Gas Indexes 1200 45000 Performance from July 2014 - Date 1000 40000 35000 30000 80 25000 60 20000 15000 40 NSE ASI (pts) Brent Spot Price ($/bbl) 120 50000 800 -42% 600 400 -18% 10000 20 5000 0 CONSUMER GOODS OIL & GAS Jan '17 Nov '16 Sep '16 Jul '16 May '16 Mar '16 Jan '16 Nov '15 Sep '15 Jul '15 May '15 Jan '15 Mar '15 Nov '14 Sep '14 Jul '14 May '14 NSEASI Jan '14 BRENT 0 Mar '14 Jan '14 Mar '14 May '14 Jul '14 Sep '14 Nov '14 Jan '15 Mar '15 May '15 Jul '15 Sep '15 Nov '15 Jan '16 Mar '16 May '16 Jul '16 Sep '16 Nov '16 Jan '17 0 -38% 200 BANKING Source: NSE, Bloomberg; PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 20 3 Nigeria: Economic Context Tighter regulation on demand in the official market resulted in a significant widening of spread between the official and parallel market rates Exchange Rate (Interbank vs Parallel market) 600 500 400 300 200 100 - Interbank (NGN/USD) Parallel (NGN/USD) Source: Central Bank of Nigeria; PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 21 3 Nigeria: Economic Context The constraints to doing business in Nigeria remain high Ease of Doing Business Rankings 2013 2014 2015 2016 2017 Ma u r it iu s 19 20 28 32 49 Rw a n da 52 32 46 62 56 Sou t h A fr ica 39 41 43 73 74 Sey ch elles 74 80 85 95 93 Gh a n a 64 67 70 144 1 08 Ken y a 121 129 136 1 08 92 Nig er ia Nu m ber of r a n ked cou n t r ies 131 147 170 169 169 1 85 1 89 1 89 1 89 190 Source: World Bank Ease of Doing Business rankings NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 22 3 Nigeria: Economic Context On the bright side, debt to GDP remains comparatively low which gives Nigeria room to borrow to fund developmental activities Nigeria – Debt to GDP Average Debt/GDP (2012- 2016) 15% 105% 10% 11% 11% 2012 2013 2014 12% 87% 42% 31% 33% 2015 2016 12% Advanced Economies European Union Emerging Middle East Sub-Saharan market and and North Africa developing Africa economies Nigeria Source: IMF World Economic Outlook October 2016 NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 23 3 Nigeria: Economic Context Historically low tax collection also provides headroom to improve revenue collection Oil tax/ GDP vs Non-Oil tax/GDP 6% 5% 4% 3% 2% 1% 0% 2011 2012 2013 Oil tax/GDP 2014 2015 Non-oil tax/GDP Source: FIRS, CBN, PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 24 4 2017 budget in focus Contents 2017 budget in focus NIGERIA 25 4 2017 budget in focus Approach to the 2017 budget The 2017 budget is designed to expand partnership between public and private sectors, including development capital to leverage and catalyse resources for growth. Contributing to food security and creating platform for agribusiness through the Agriculture Green Alternative Plan Food security Focusing on critical ongoing infrastructure projects roads, power, ICT, that have quick positive effects on the economy Utilizing Special Economic Zones and Industrial Parks as vehicles to accelerate activity for innovation and wealth Infrastructural Real estate development development Key objectives of the 2017 budget Accelerate economic activity Stimulate entrepreneurship Establishing a Social Housing Fund to deepen the mortgage system and expand its availability across all states of the Federation Encouraging and stimulating the growth of SMEs for job creation, productivity and wealth creation Poverty alleviation Providing social safety nets for poor and vulnerable Nigerians. NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 26 4 2017 budget in focus Key assumptions of the 2017 budget Financing the deficit Overall projected budget fiscal deficit of N2.36 trillion for 2017, which is about 2.18% of GDP Key Assumptions The budget deficit is to be financed mainly by borrowings which have been projected at N2.32 trillion N1.067 trillion (46% of this borrowing) is intended to be sourced externally, while N1.25 trillion will be sourced domestically The debt service to revenue ratio is projected to be about 33.7% in FY2017 NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 27 4 2017 budget in focus 2017 budget revenue proposals – Where the money is coming from? 2016 Approved Budget NGN3,856 billion 2017 Approved Proposal NGN4,942 billion 2% 21% 15% 39% 41% 16% 38% 28% NIGERIA PwC Oil revenue Oil revenue Non oil revenue Non oil revenue Independent revenue Independent revenue Other revenues Other revenues Confidential Information for the sole benefit and use of PwC’s Client. February 2017 28 4 2017 budget in focus 2017 budget expenditure proposals – Where the money is going… 2016 budget expenditure NGN6,060 billion 2017 budget expenditure Statutory tranasfers Statutory tranasfers 6% 6% 31% 22% Debt service 30% 22% Sinking fund 2% 39% NIGERIA PwC NGN7,298 billion Sinking fund 2% Non-debt recurrent expenditure Capital expenditure Debt service 40% Confidential Information for the sole benefit and use of PwC’s Client. Non-debt recurrent expenditure Capital expenditure February 2017 29 4 2017 budget in focus Capital expenditure in the proposed 2017 budget Allocating ~30% of the 2017 budget to capital expenditure at NGN2.24 trillion Key sectoral capital allocations 56% 20% 12% 7% 4% 1% Infrastructure Governance & Security Economic Reforms/Growth Social Development States and Regional Development Environment Top 4 infrastructural spending budget 60% 50% 51% 40% 30% 25% 20% 14% 13% Special Intervention Programmes Defence 10% 0% Power, Works and Housing Transportation The 2017 budget is an Infrastructure budget and a total of NGN 1.047 trillion is dedicated to key infrastructural spending NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 30 5 Sector Outlook Contents Sector Outlook NIGERIA 31 5 Sector Outlook Construction and Industrial goods Construction Opportunities Threats Over 60% of the Federal government’s CAPEX has been earmarked for construction activities. Infrastructure deficit estimated at over US$2tn (US$100 billion p.a.), Provision in 2017 budget at US$3.2 billion) This creates opportunities for Private Public Partnerships (PPPs) due to the huge funding gap Limited traditional funding options Bureaucratic challenges in government agencies Limited forex supply can significantly affect the cost of imported raw materials thus distorting project assumptions. Insecurity challenges in some states could deter investments Threats Opportunities Federal government budget for contribution of NGN100bn towards NGN1 trillion housing programme signals strong demand over the medium term Zero percent tariff on import of machinery and equipment should reduce investment cost Stiffer industry competition and challenges relating cost control and optimal energy mix Vulnerability to forex volatility as further depreciation of naira and fluctuation in exchange rate may hamper production planning Oil & Gas production distortions in the Niger-Delta threatens access to gas which is a key for production Industrial Goods NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 32 5 Sector Outlook Agriculture and Insurance Agriculture Opportunities Increased budget allocation for agriculture infrastructure (NGN91billion in 2017 vs NGN76billion in2016) Import restriction on key food items (rice and palm oil) with significant supply deficit Improved profitability of export commodities due to currency depreciation Low cost of funding through the CBN and other intervention funds Threats Focus on the wheat value chain may not translate to economic gains due to climatic challenges Underdevelopment of agriculture value chain limits the number of bankable projects Insecurity in key food-producing areas could impact farm output and route-to-market Opportunities Increased implementation of the local content policy to benefit insurers Threats Provision of credit to small scale artisans and traders to increase opportunities for micro-insurance Agriculture insurance to receive a boost as government investments and incentives across the Agriculture value chain increase Measures to broaden the tax base and more stringent tax policies could reduce discretionary income and thus demand for insurance Knock-on effects from low interest rates, economic slowdown could impact investment portfolios of insurers Creation of 500,000 jobs as NCE teachers across the federation should promote HMOs and pension inclusion Insurance NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 33 5 Sector Outlook Banking and FMCG Banking Opportunities Credit growth to the Agriculture and solid minerals sectors should improve on the provision of subsidized funding Increased CAPEX spend could provide some boost to loan growth Passage of PIB to open up the upstream Oil & Gas sector for further investments and loan syndication opportunities Loans to market women, artisans and traders could resuscitate intervention funds which will improve credit to the real sector Fiscal incentives to encourage the industrial and manufacturing sector to provide boost for asset creation Long term infrastructure lending will be channeled towards government’s plan to complete critical infrastructure Threats A higher budget deficit implies a higher domestic bond issuance (NGN1.2 trillion) which could push yields higher, resulting in market to market losses Higher macro-risk on the back on slower growth could result in higher NPLs Rapid changes in technological progress towards a digital economy threatens conventional banking approach Threats Opportunities Import substitution strategy to encourage domestic production of consumer inputs Export expansion grant should promote exporters’ competitiveness Highly vulnerability to exchange rate pressures with negative impact on demand and production costs Stiffer competition and continuous evolution of low-priced substitutes Product demand is quite price elastic. Price adjustments often pose risk to revenue growth Fast Moving consumer Goods (FMCG) NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 34 5 Sector Outlook Oil & Gas, Power & Energy Oil and Gas Threats Opportunities A higher oil price and/or further devaluation in the exchange rate could increase the landing cost of PMS above the administered price Favourable economic policies to attract domestic and foreign investments to the petroleum refinery sub-sector Without clarity on the subsidy stance, cost to the government increases if reimbursements have to be made Increasing opportunities for downstream activities as the import substitution strategy gains traction. This creates a strong potential for petrochemical industry Crude oil production disruptions in the Niger-Delta Lower export proceeds from the government via the NNPC could adversely impact import quota allocations for refined crude - PMS, AGO Government to expedite action in the consideration and passage of the Petroleum Industry Bill (PIB) Threats Opportunities Investment in gas generation and distribution to improve electricity generation Favourable economic policies to attract domestic and foreign investments to the petroleum refinery sub-sector Encouragement of the Independent Power Producer (IPP) model Expansion of the transmission grid Cash shortfalls in the sector, leading to transaction complexity The CAPEX allocation of NGN50 billion (US$200 million) to the transmission company relative to an annual investment requirement of US$1 billion (over the next 5 years) represents a huge funding deficit Gas supply shortages due to disruptions in the Niger-Delta region Power and Energy NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 35 6 Economic Outlook Contents Economic Outlook NIGERIA 36 6 Economic Outlook Fiscal risks (1/2) Oil production volumes Reform implementation Global oil market uncertainties Higher yields Fiscal policy risks NIGERIA PwC Global oil market uncertainties: Futures markets and consensus forecasts suggest oil price risks are skewed to the upside. Nevertheless, with excess capacity in the market and downside risks to global growth, a further drop in prices remains a possibility Oil production volumes: Production disruptions owing to the Niger-Delta conflict presents a key risk to revenues. Moreover, the last time oil production volumes in Nigeria hit 2.2mbpd was in 2006 under more benign conditions in the Niger-Delta Reform implementation: A failure to implement key reforms in particular, the energy sector and the foreign exchange market could keep investor confidence weak and limit Foreign Direct Investment and Foreign Portfolio flows Higher yields: A potential increase in the domestic bond issuance pipeline would keep upward pressure on yields, thus increasing domestic financing costs. We estimate the size of bond issuances could increase by as much as 35% to N1.29 trillion (2016: N955.7 billion) Confidential Information for the sole benefit and use of PwC’s Client. February 2017 37 6 Economic Outlook Fiscal risks (2/2) Policy rate Fiscal policy risks Budget implementation External borrowings NIGERIA PwC Policy rate: The need to keep real interest rates positive and improve the Interest Rate Differential (IRD) as global interest rates rise suggest the Monetary Policy Rate (MPR) will remain high Budget implementation: Inability to meet revenue targets will require an expenditure adjustment. Capital Expenditure is usually the first causality as recurrent (non-debt) expenditure is treated as non-discretionary External borrowings: More volatile global financial market conditions could constrain external financing, putting additional pressure on reserves, domestic liquidity, and credit. Concessionary borrowing from Development Financial Institutions (DFIs) would usually require an agreement to comply with stringent reforms. Without cheap funding from these sources, Nigeria will need to rely on commercial funding at much steeper rates Confidential Information for the sole benefit and use of PwC’s Client. February 2017 38 6 Economic Outlook Investors, businesses and policy makers should prepare for three potential scenarios unfolding in Nigeria in 2017: (1/3) Scenario assumptions Scenario 1 : Oil production shock deepens along with price decline - Oil price reverts back to 2016 average of $45/bbl based on a rebound in production of shale producers and OPEC - Disruptions in the Niger-Delta heighten and persist through the year 2017 - Crude Oil production drops to 1.4mbpd - Increase in Electricity Tariff by 30% Economic and policy outcomes - A significant contraction in oil sector and falling government oil revenues persist - Government pushes for more external borrowing as domestic yield environment remains high - Real output Growth projected at -3.7% - Pressure on the Naira leads floating of exchange rate, which could lead to 23.5% depreciation from the current NGN/USD 305 - Inflationary pressure persist with a projected average inflation reached 19.01%. Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 39 6 Economic Outlook Investors, businesses and policy makers should prepare for three potential scenarios unfolding in Nigeria in 2017: (2/3) Scenario assumptions - Oil price maintained at average of $55/bbl. Scenario 2: Oil production stabilizes - Disruptions in the Niger-Delta moderate with Crude Oil production 1.7mbpd - Increase in Electricity Tariff by 30% Economic and policy outcomes - The Nigerian economy grows by 0.7% - The pressure on the Naira moderates with slight depreciation in the official rate by 4.68% to 320 - Average Inflation rate should moderate to 14.4% - CBN strives to narrow exchange rate differential between the parallel and the interbank market by increasing FX supply Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 40 6 Economic Outlook Investors, businesses and policy makers should prepare for three potential scenarios unfolding in Nigeria in 2017: (3/3) Scenario assumptions - Oil price ramps up to $60/bbl. Scenario 3: Oil price ramps up along with oil production volumes - Crude oil production reaches 2.0mbpd on the basis of peace agreement with militants in Niger-Delta - Foreign exchange market is liberalised further Economic and policy outcomes - Economy recovers with 2.8% growth in real GDP - Consumption and investment should pick up, albeit gradually - Naira appreciates marginally in the parallel market and stays flat in the interbank space supported by foreign investment flows - Average Inflation rate moderates to 12.5% Source PwC Analysis NIGERIA PwC Confidential Information for the sole benefit and use of PwC’s Client. February 2017 41 Thank you © 2017 PricewaterhouseCoopers Limited. All rights reserved. In this document, PwC refers to the Nigerian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
