04 November 2013, Lagos – One major preoccupation of the federal government is how to check the growing incidence of theft of crude oil, but a report by Standard Chartered Bank says the various measures put in place to halt the economic sabotage may be marred by the current political instability, reports Festus Akanbi
As deliberations on the 2014 Budget begin at the National Assembly in the weeks to come, there are fears the stalemate over the factionalisation of the ruling Peoples Democratic Party may work against the current effort to tackle the ongoing sabotage of the nation’s energy resources.
According the latest economic report of the Standard Chartered Bank, entitled “Regional Overview – Key Trends in FDI, Unpacking the World Investment Report,” the major threat to the Nigerian economy and by implication the implementation of the 2014 budget is the fear of lack of consensus by the relevant authorities to tackle the problem of theft of crude oil and its attendant dip in the nation’s revenue.
Medium-Term Budget Strategy
The report noted that plans outlined in Nigeria’s Medium-Term Budget Strategy Paper suggest a moderation of total spending in 2014, to N4.5tn, from N5tn in 2013.
It raised the alarm that from a growth perspective, the share of recurrent spending would rise to73.8% of total spending, up from 64% in the current FY (increasing c.4% in nominal terms, to N3.32tn in 2014 from N3.2tn in 2013, but squeezing capital expenditure). A benchmark price of crude of $74/barrel is initially proposed, although this has typically been subject to upward revision in the past, adding that average oil output levels of 2.39 million barrels per day (mmbd) are also assumed.
The report said given the current political backdrop, budget assumptions for 2014 appear overly ambitious. This is because, according to the report, currently, official estimates suggest that as much as one-fifth of the country’s oil output is lost to theft.
Given the fact that actual output levels have averaged far less than the 2.53mmbpd assumed in the 2013 budget, the report warned that it is likely that oil output levels will similarly undershoot the 2.39mmbpd assumed for 2014, necessitating reliance on Nigeria’s excess crude earnings for budget ‘augmentation’.
“The net effect is to reduce any buffer Nigeria might have in place against a more sustained decline in oil earnings. With politics moving to centre stage, the consensus needed to tackle oil theft may be elusive. Spending and borrowing plans should be gauged in this light,” the report said.
Upset in Calculation at the N’ Assembly
On the effect of the crisis within PDP fold, the report noted that although reconciliation talks are promised, (there is much mention of the ‘inbuilt conflict resolution mechanism of the PDP’), the PDP might nonetheless lose its majority in both the Senate and the House. This could complicate the passage of any legislation. Given current circumstances, it is highly unlikely that Nigeria’s long deliberated Petroleum Industry Bill (PIB) will be passed soon. An end to regulatory uncertainty is thought necessary to unlock new investment in the upstream oil sector.
Even the passage of the 2014 Budget, expected to be read at the end of October, may become more difficult, further complicating the economic outlook. On the preparation for next election, the report noted that, “Whatever the aims outlined in the budget framework, Nigeria has rarely faced elections without seeing a rise in spending. In 2010, the year before the 2011 elections, Federal Government spending increased c.50% y/y, boosted by supplementary budgets. While the plan is to cut overall spending in 2014 because of the strain on oil earnings, Nigerian politics are notoriously dependent on patronage. A protracted period of negotiations ahead of party primaries would likely require even greater spending than outlined in the 2014 budget. Although official budget plans see the 2014 deficit capped at c.1.9% of GDP (1.8% in 2013), and borrowing of c. N572bn after N577bn in 2013, we see upside risks to spending, deficit and borrowing projections.
“Revenue is likely to disappoint relative to budget projections. The more contentious is the politics (especially in the Delta region), the greater the likelihood of further slippage in oil production and earning,” the report noted.
It stated that Q2 GDP data points to a slowdown in economic momentum as real growth of only 6.18%y/y was recorded in Q2-2013, a further slowdown from the 6.56% growth in Q1, which was itself measured off a weak base, explaining that a 1.15% contraction in the oil sector contributed significantly to this weak performance.
Data showed that production of only 2.11mmbpd was recorded in Q2-2013, down from 2.29mmbpd in Q1. A slowdown was also evident in the non-oil sector, which grew 7.36%, down from 7.89% in Q1-2013.
“Slower growth was attributed to lower electricity generation, given problems with gas supply. This impacted manufacturing and telecoms and was even cited as a factor in the weaker wholesale and retail trend. In addition, Nigeria’s security situation, and confidence may have continued to weigh on trend growth.
“Hopes for a turnaround now rest on power-sector reforms. Effective October 1, several state-owned power distribution and generation assets were sold to largely local private investors. A further round of bidding should bring the sale of new power plants, perhaps drawing more foreign investor interest. While weak investment in Nigeria’s transmission network and erratic gas supply remain potential stumbling blocks, the hope is that meaningful improvement in electricity supply might be achieved ahead of Nigeria’s next election. In this case, the political cycle might work in the economy’s favour,” the report said.
Despite the overall increase in FDI to Africa in 2012, West Africa and Southern Africa saw declining FDI inflows. Nigeria’s FDI declined to $7bn in 2012 from $8.9bn in 2011. But the report said failure to pass the Petroleum Industry Bill, with regulatory uncertainty weighing on investment in Nigeria’s upstream oil sector, may well have been a factor. It also listed the deteriorating security situation and its cyclical influence on growth prospects as a factor.
Onset of Political Cycle
The early onset of the political cycle in the country before 2015 elections are formally due to risks adding to the uncertainty. Consequently, the report said planned FDI might be put on hold until there is greater clarity on outcomes. “The top five host economies (i.e. recipients of FDI) in Africa in 2012 were (1) Nigeria, (2) Mozambique, (3) South Africa, (4) the DRC and (5) new oil producer Ghana. The top five home economies for FDI in Africa (the sources of FDI, therefore benefiting from growth elsewhere) were (1) South Africa, (2) Angola, (3) Libya, (4) Nigeria and (5) Liberia. Again, there is a strong correlation with oil-rich economies that have managed to build up surpluses over time.
In Nigeria’s case, pan-African banking FDI may also have been a driver.
Commenting on the flow of foreign direct investment into Africa, the Standard Chartered Report said, “FDI inflows to Africa reached a milestone in 2012, increasing by 5% to total $50bn. According to UNCTAD data, Africa was the only region globally to record a rise in FDI in 2012.
As impressive as this might be, Africa accounts for a paltry 3.7% of the global total of FDI flows of $1.35tn. However, this number looks set to grow more meaningfully in the medium term. Almost across the board, frontier African countries are attracting more FDI.”
According to the statistics churned out by the bank, Africa’s stock of FDI represents $630bn, or approximately 2.76%, of a 2012 global total of $22.8tn. “Should we be surprised by these figures? Not necessarily. Traditionally, much of the FDI that Africa has attracted has been resource-focused. However, even in resource exploration, Africa has lagged behind.
Rebasing Nigeria’s GDP
“Nigeria’s GDP statistics are due to be rebased and a revision to its economy size is probable (some think to levels that would bring it closer to that of South Africa).
“In recent years, Nigeria has been among the top destinations for FDI in Africa, consistent with its rapid growth rate. However, when measuring the stock of FDI, Nigeria’s total is $76.3bn; South Africa’s total is almost double the amount –$139.0bn. Any rebasing of Nigeria’s GDP that puts it close to South Africa in terms of economy size would likely reveal that Nigeria punches well below its weight in terms of stock of FDI. Given the dominance of oil economies as recipients of FDI in Africa over the last decade, this provides food for thought,” Standard Chartered said in the report.