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Published On: Mon, Dec 4th, 2017

2018 budget: High on hope, low on prospects

 

.           Promises of growth and development may be unattainable

The 2018 budget will go down in history as the most vilified and repudiated by the legislature that is supposed to give it a stamp of authority. Last week, the two chambers of the National Assembly took a perfunctory appraisal of the budget and consigned it to the rubbish heap of history, dismissing it as a bad product from an unprepared and unserious team.

No invectives and adjectives were spared in denouncing the budget by the lawmakers, suggesting that the country is in for a rough ride economically in the coming days and months. It had no supporters as members lined up behind each other in condemning the spirit and letters of the financial document.

Words such as ‘unrealistic’, ‘fictitious’, ‘imaginary and creative imagination’, ‘wishful thinking’, ‘weak foundation’ etc, were effusively and generously used to qualify the budget as members strained to find any substance and rationale to justify its economic and financial assumptions and projections. Particularly annoying to the legislators is the ignominious indignity meted out to the 2017 budget by the executive, a treatment they perceived as insulting to them and negligent for the people.

Budget making is traditional in government and is expected to be a routine practice that should not cause much concern or controversy over its preparation or approval. Putting together how to earn and spend money should not be a rocket science that does stand even the most elementary scrutiny.  Ordinarily, the budget is prepared by the executive and approved by the legislature.

Both chambers of the National Assembly berated the Federal Government’s 2018 budget proposal, saying its assumptions are unrealistic. The debate started on a dramatic note when Senator EnyinnayaAbaribe dismissed the 2018 budget proposal as being “fictitious.”

His position though extreme could be justified given the fact that there has not been real budget implementation since the coming of this government as a result of inconsistencies in expenditure proposals and revenue projections. According to the government 2018 budget was designed to consolidate on the achievements of the 2016 and 2017 budgets. What then was done in 2017 when only less than 15 per cent of that budget was released only 60 percent of it is being carried over to 2018?

“In what sense will this 2018 budget be predicated on assumptions that have already been destroyed? For instance, you are assuming N11trillion revenue, yet you are getting less than N1tn. How does that happen? That is why I said, with all due respect to my colleagues, that it is imaginary. I am saying that rather than continuing to debate this (budget) that has no basis in reality”, he said.

This was the line of discussion that followed and all the senators had one opinion to give: The country is being taken for a big ride. Some first examined the performance of the 2017 budget, which they described as “very abysmal to say the least,” and referred to the proposed 2018 budget as “wishful thinking.”

Concerned and anxiety over the assumptions and projections in the budget are germane and understandable if one is purged of the overoptimistic and propagandistic pastime of partisanship. The budget assumes that all is already well with the economy and every expected revenue will be met. From recent experience and emerging economic trends this is a far cry from reality.

First the government is trying to impress the country with its huge ambitious plan and programmes without reference to the financial capacity of the economy to sustain and support the expenditure involved. This has happened throughout the life of the administration that it is becoming habitual and deliberate. Common sense instruct that receivable should determine expenditure and not otherwise.

Although the economy has exited recession which dogged it for six quarters, the economy is still fragile and faces major challenges of development. It is still a mono-product economy depending significantly on oil revenue as all the grandiose government talk for diversification has remained tendentious and inconclusive.

Already the budget has run into the first road block in its presumptuous grandstanding as OPEC, the oil producing cartel, has put a cap on Nigeria’s production output to 1.8 million barrels per day, mbpd, which is our top production level in 2017. Now, the Medium Term Expenditure Framework, MTEF, and Fiscal Strategy Papers, projects oil output for the budget at 2.2 mbpd, creating a revenue gap of 400,000 bpd.

At the projected growth rate of 3.5 percent, the economy may be in serious danger of another recession given the burgeoning problems of unemployment at 26 percent, population growth at 3.2 percent and failed public infrastructure requiring over $100 billion or over 10 years annual budget a present level. Inflation is at 15 percent and interest rate at over 20 percent with MPR at 14 percent.

These are not pleasant pictures of an economy to be consolidated; the economy is in distress and requires an emergency treatment. Instead we are getting a political jamboree that may eventually end in disappointment and more distress and hardship. With recurrent expenditure (administrative costs and debt service only) at N5.5 trillion or nearly 70 percent of the N8.4 trillion budget it is obvious that this budget cannot deliver on its promise.

Compounding an already bad situation is the fate of capital expenditure which is he real budget for the economy because of its direct impact of the people. Recurrent only caters for the 2.4 million people who work in government while the rest of the over 170 million Nigerians lie on handouts and crumbles. It is an unjust and inequitable system that government should have tried assiduously to change.

Capital expenditure in 2017 budget was 1.9 trillion about 34 percent of the N7.3 budget, but only N450 billion was released, with a shortfall of N1.45 trillion, which has been forwarded to the 2018 fiscal year. In actual fact, the N2.4 trillion capex for 2018 is consists of only N900 billion new expending in addition o the unspent 2017 appropriation.

Worse still is the fact that N2 trillion of the capex is not based on accruable revenue but expected borrowing, the fate that befell the 2017 capex. How it will be accomplished given the sad outcome in 2017 is anybody’s guise, but the truth is that there are too many loose ends and imponderables in the assumptions.

“We have a population of 180 million people, India has 1.3 billion. Then, if we are going to have more people in poverty than India, then we have to create jobs,” said Senate Ben Bruce.

At present 29 states in the country owe between three and 13 months salaries of workers and are depending on budget support from the federal government. In view of all these, it is obvious that we will be building the 2018 budget on a “very weak foundation.” So from where does the confidence and hope that the budget is an elixir come?

Nigeria’s non-oil revenue fell by 74 per cent in 2017, adding, “This is very disturbing and alarming indeed, especially when you consider the fact that the 2018 budget is predicated heavily on non-oil revenue.” Non-oil revenue was supposed to contribute N4.165tn, which is almost 50 per cent of the N8.6tn budget.

“If something goes wrong and we don’t realise this N4.165tn, it means the budget will be as good as dead.

“While we are happy that the foreign reserves are rising as a result of increase in oil prices, this budget will only be implemented if the federal administration is efficient. It is still inefficient because the revenue institutions are not performing to the expectation of the budget.

According to Senator Ben Bruce, while it was called a budget of consolidation, it is rather a budget of ‘active imagination’. So, we have 2.4 million people consuming 60 per cent of the recurrent expenditure of Nigeria. It doesn’t make any sense.

“For you to diversify and rely on non-oil revenue, that sector must be developed. The proposed non-oil revenue cannot be realised. People don’t believe in our budget.

There is no need to raise the hope of Nigerians to say we are estimating N8.6tn whereas the execution is zero. If we say the budget is N3tn and execution is N3tn, it is better than N10tn and the execution is revenue shortfall.”

However, the current 2017 budget of N7.441tn is still running, with only N450bn so far released for capital projects. The 2018 budget has a capital provision of over N2.2tn. The implementation of the budget had commenced in June with an extension granted till May 2018. But this only happen now if the 2018 budget is passed before the end of the year as anticipated by government because it has become part of the 2018 budget.

President Buhari had promised to raise capital implementation to at least 50 per cent (N1.1tn) by December this year. But, with barely 33 days left to the end of the year, it could only release N450bn, especially with the unlikelihood of getting the budget passed before the end of the year since the 2017 budget has been collapsed into the 2018 budget.

 

Break down      

Nigeria’s President, MuhammaduBuhari has proposed N8.6trn for the 2018 financial year.

President Buhari disclosed this at the Joint Session of the National Assembly on Tuesday, November 7 in Abuja, Nigeria’s capital during the presentation of the 2018 Budget Proposal.

The President said during the presentation that the capital projects that were not implemented in 2017 would be carried over into 2018.

The 2018 Budget which has been tagged as the Budget of Consolidation, will return to a cycle that starts from January and ends in December 2018.

30.8% of the 2018 Budget will be for Capital Expenditure. The breakdown of 2018 budget presented by the President, shows that the Proposed Recurrent Expenditure will take N6.18tn, Proposed Capital Expenditure will at N2.42tn, bringing the total proposed budget size to N8.6tn.

 

Assumptions

  • Benchmark Oil Price – $45 per barrel
  • Oil Production: 2.3mbpd
  • Exchange rate: N305/$1
  • Inflation Rate: 12.4%

Expenditure Estimates

  • Recurrent Costs of N3.494 trillion
  • Debt Service of N2.014 trillion
  • Statutory Transfers of about N456 billion
  • Sinking Fund of N220 billion
  • Capital Expenditure of N2.428 trillion

Recurrent Expenditure

  • 87 billion for Interior
  • 01 billion for Education
  • 43 billion for Defence
  • 34 billion for Health

Capital Expenditure

  • Power, Works, and Housing: N555.88 billion
  • Transportation: N263.10 billion
  • Special Intervention Programmes: N150.00 billion
  • Defence: N145.00 billion
  • Agriculture and Rural Development N118.98 billion
  • Water Resources: N95.11 billion
  • Industry, Trade, and Investment: N82.92 billion
  • Interior: N63.26 billion
  • Education N61.73 billion
  • Universal Basic Education Commission: N109.06 billion
  • Health: N71.11 billion
  • Federal Capital Territory: N40.30 billion
  • Zonal Intervention Projects N100.00 billion
  • North East Intervention Fund N45.00 billion
  • Niger Delta Ministry: N53.89 billion
  • Niger Delta Development Commission: N71.20 billion.

 

Key projects and programmes to be implemented in 2018:

  • 8 billion for the Mambilla hydropower project, including N8.5 billion as counterpart

funding

  • N12 billion counterpart funding for earmarked transmission lines and substations
  • 41 billion for the National Housing Programme
  • 00 billion for the 2nd Niger Bridge
  • About N300 billion for the construction and rehabilitation of strategic roads

Regional Spending Priorities for Peace, Security, and Development

  • N65 billion for the Presidential Amnesty Programme has been retained in the 2018 Budget
  • Capital provision for the Ministry of Niger Delta increased to N53.89 billion from the N34.20 billion provided in 2017
  • Completion of East-West Road, with a provision of about N17.32 billion in 2018.

 

Dangotecem conquers Africa

By Daniel Zubair

Like a mustard seed committed to a viable soil, though small in its inherent nature, but anticipated to become the giant of all Dangote Cement has unraveled this anticipated mystery in no small measures. From its humble take off, the company now dominates the business in the continent.

Established in May 1981 as a trading business on cement, the trail blazer in its intrinsic nature of a world player, gave a positive nod to becoming “THE VOICE” in cement industry in Nigeria when in year 2000, the then Benue Cement Company operating at 3 million metric tonnes per annum was acquired from the Federal Government of Nigeria under the privatization programme as a mark of commitment to this purpose.

In its stride of spreading tentacles and breaking bounds, Dangote Cement yet, made another quintessential history in establishing the largest cement plant in Africa located in the heart of the Confluence state – Kogi State. Obajana Cement with its initial 10.25mmtpa capacity across the three operating lines lay to rest the hypothetical question of biggest player in the cement industry; Obajana commissioned in July 2010 clearly showed who the master of the game is.

As a company given to constant innovation and expansion, complacency was not allowed a chance as the super brand being driven by vision and commitment, added another milestone to its success trajectory in 2012 on the establishment of 6.0 mmtpa, an investment worth $1 billion in Ibese Ogun State. Poised to make cement which is one of the most essential building materials both accessible and affordable in not just Nigeria market where it commands up to 65% market share Dangote Cement has equally launched its value driven product across some African countries with the chief aim of expanding Africa market frontiers in the quest for push to global world markets.

Like the Midas Torch, the economic renaissance mission of Dangote Cement has been predicated on its physical presence in countries like: Senegal with producing plant of 1.5mmtpa, Zambia with producing plant of 1.5mmtpa, Tanzania with producing plant of 1.5mmtpa, South Africa with producing plant of 2.2mmtpa, Ethiopia with producing plant of 1.5mmtpa, Cameroun with 1.5mmtpa; and most recently, the $300 million worth of 1.5mmtpa plant in Mfila, Congo Brazzaville are laudable landmark achievements of Dangote Cement  asides servicing terminals in countries like: Ghana with 3.0mmtpa, Sierra Leone with 0.5mmtpa, Ivory Coast with 1.0mmtpa and Liberia with 0.5mmtpa. Indeed, the mustard seed has truly become a oak tree.

Notwithstanding the Moody’s corporate family rating (CFR) of B1 from its former position of Ba3 as a result of Nigeria’s continuing economic challenges where the company has its major business stake, the company’s national scale rating (NSR) remains unaffected at Aaa.ng. This is made evident in the company’s performance as shown in its unaudited results for the Nine Months Ended 30th September, 2017.

 

 

 

SUPPORT ED RESULTS ANALYSIS

 

Q3-17 result, showing revenue (27.4% y/y), EBITDA (95.1% y/y), and PAT (63.1% y/y) all grew strongly at the Group level. Revenue was below our estimate by 6% while EBITDA (on lower other incomes) and PAT (on significantly higher tax charge) lagged by 12% and 16% respectively. Compared to Q2-17, decline was recorded across all line items – revenue (-6.7%), EBITDA (-10%), and PAT (-33%).

The revenue growth was underpinned by higher average prices (40% y/y), which more than compensated for the decline in volume (9% y/y). Compared to Q2-17, volume was lower by 12% while price increased by 6%. Expectedly, the Group volume was dragged mainly by the Nigerian operation, wherein sales fell by 11.8% y/y and 10% q/q on (1) still higher prices (55% y/y, but -0.3% q/q), (2) weak construction activities nationwide, and (3) longer rainy days. The non-Nigerian volume fell by 5% y/y and c.15% q/q, amidst 19% increase (y/y and q/q apiece) in average realized prices.

The Group gross margin (GM) of 56.9% – consistent with our estimate – was ahead of Q3-16’s (38.3%), and slightly improved from the 56.1% reported in Q2-17. Gross margin in Nigeria remained well-above the previous year’s figure, but declined marginally relative to Q2-17, on lower price and slightly higher per tonne production cost. To be specific, raw materials cost in Nigeria increased by 30% q/q. On the other hand, Non-Nigerian gross margin increased by more than 800 bps y/y and q/q apiece, as higher price more than offset the marginal increase (5% y/y and q/q each) in per tonne production cost.

Group opex rose by 14% y/y and 16% q/q. In Nigeria, opex remained well contained while sharp increases (27% y/y and 51% q/q) were recorded overseas. At the Group level, the EBITDA margin of 47.5% was higher by 1649bps y/y, with Nigerian realized 62.4% EBITDA margin coming above Q3-16 (38.5%) but lower than Q2-17 (63.7%) rates. Notably, both EBITDA and EBITDA margin grew y/y and q/q for the Non-Nigerian operation.

Group net finance cost of N5 billion was reported, comprising pan-African net cost of N12.5 billion (vs N26.4 billion in Q2-17) and Nigerian net income of N7.4 billion (vs. N24.4 billion in Q2-17). The Nigerian operation reported forex gain of N5.4 billion (vs N21 billion in Q2-17) during the period. The Group finance income and cost items reflect the movement in the naira exchange rate from N245/USD average in 9M-16 to N314/USD in 9M-17.

A tax charge of N15.5 billion was reported by the Group during the three months period, from a credit of N6.3 billion the previous year. This equates to an effective rate of 24%, the Group’s highest since Q2-16, and is linked to the Nigerian business, wherein effective tax rate was c.18% (highest since Q4-14), from 5% in Q2-17. Management had guided to a higher Nigerian ETR over 2017 (with some plants having come out of pioneer status), but the rate reported during the review period is surprising.

Dangote Cement has a very strong credit profile, and would likely be rated higher without its linkage with Nigeria, in part because of its leverage which registered 1.3x gross debt/EBITDA for the last twelve months ended 30 September 2017. This is significantly low relative to global peers, even those rated investment grade.

The strong standalone profile also incorporates 1) high operating margins trending above 50 percent; (2) high interest coverage as measured by EBIT/interest expense trending above 8x over the next 18 months; and (3) conservative funding policies with debt funding matched to the currency of cash flow generation and prudent financial policies which will ensure sustenance of strong credit metrics through operating and project build cycles.
Furthermore Dangote’s sales and margins continue to benefit from the ongoing activity in the Nigerian economy. Nevertheless Dangote remains at this stage strongly linked to Nigeria and its economy, with 89 percent of its EBITDA anchored in the country for the 9 months ended 30 September 2017.

Its investments in new plant capacity in other sub Saharan countries will provide more diversification in future but it will take several years before there is a meaningful diversification of revenue, profits and cashflows away from the Nigerian economy. Pan-African volumes expected to reach 40 percent of total sales volumes by 2020.
The ratings also factor in (1) the relatively small scale level of cement production when compared to global peers along with production of 23.6 million tonnes (mt) for the Financial Year Ended (FYE) 31 December 2016; and (2) a concentration of production in Nigeria, representing around 68 percent of revenues for the FYE 2016.
DCP’s ratings are further predicated upon (1) a continuing growing cement market share of 65 percent in Nigeria as Africa’s most populous country and its largest economy where GDP is expected to reset to growth levels of around 2.5 percent in 2017 despite the ensuing low oil price environment; (2) protected domestic production in the various African markets in which it operates, given on-going restrictions on imports; and (3) competitive advantage brought about by an intention to always be the lowest cost cement producer in the markets where it operates, with a differentiated offering in Nigeria through access to low cost coal as an energy resource and a comprehensive fleet network.

Notwithstanding the lower-than-expected Q3 earnings, DANGOTE CEMENT’s performance over the nine months of 2017 was very strong and consistent with the broadly expected impressive year for the Group.

 

 

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