INVESTMENT analysts have predicted that the Federal Government’s fiscal expansion policy contained in the Medium Term Expenditure Framework (MTEF) may impact positively on banks and other company’s earnings in 2016.
The MTEF highlights Federal Government’s revenue and expenditure framework for the next three fiscal years and provides a sketchy view of the policy direction of the fiscal arm of the government.
But according to a team of analysts in Afrinvest West Africa, led by Mr. Ayodeji Ebo, the MTEF would be a big relief from the one-sided drive of the economy embarked on by the monetary authority since the inception of the new government.
According to the investment banking firm, the Federal Government’s policy thrust is centred on implementation of policies to ensure fiscal stability, improve fiscal non-oil revenue, lower inflation rate and ensure real sector growth.
It stated that the projected doubling of domestic borrowing (mostly through issuance of bond instruments) might likely trigger an upward re-pricing of yields in the fixed income market in 2016 given the anticipated increase in supply of fixed income instruments. They explained that the uncertainties in the foreign exchange market also run against the fiscal plan of government as foreign capital inflows would remain stunted, leaving the domestic market to fully fund the domestic component in 2016.
“Thus, even as we view the planned fiscal expansion to be positive for company earnings, sentiment for equities would remain guided by foreign exchange rate dynamics, success of government’s effort to diversify the revenue base and implementation of the capital-vote component of proposed budgetary plan,” the analysts stated.
The analysts explained: “We consider the fiscal plan of the Federal Government to reduce recurrent spending and simultaneously increase capital vote positively and broadly in line with the objectives of the budget to achieve infrastructural development and inclusive growth.
“Nonetheless, the expenditure numbers appear a bit ambitious relative to revenue sources, given the lower oil revenue environment and deteriorating macroeconomic fundamentals that have weighed on company earnings and taxable revenues of companies and individuals already in the tax net. Thus, for the revenue- generating agencies such as the Customs and Federal Inland Revenue Service (FIRS) to achieve their revenue target, a conscious effort needs to be made in expanding the tax base and deploying more efficient collection platforms to effectively ensure compliance.”
However, a breakdown of the MTEF, accordingly, showed that the government is proposing an expansionary fiscal policy in 2016 in a bid to reflate the economy through investment in key infrastructure and social welfare spending. Thus, a total expenditure of N6.1 trillion was proposed for 2016, representing a 34.6 per cent and 38.8 per cent jump relative to the N4.5 trillion budgeted in 2015 and our N4.4 trillion estimate for the fiscal year based on actual expenditure as at Q3:2015. 30 per cent of total expenditure (N1.6 trillion) has been budgeted for capital expenditure as against 16 per cent in the previous year. A N300 billion Special Interventions Fund is also proposed for Conditional Cash Transfers (CCT) and other social welfare spending programmes. Debt service is the only item of recurrent spending expected to increase; proposed to grow 42.8 per cent to N1.4 trillion.
Afrinvest, however, stated that non-oil revenue is expected to contribute a greater portion to the total Federal Government revenue in line with the drive to diversify its revenue base.
Capital market to help banks bridge $30bn infrastructure gap –FBN
BANKING and Investment arms of FBN Holdings Group, FBN Capital Limited, has disclosed that the banking industry alone cannot meet the $30 billion requirements for Nigeria’s infrastructure financing. Managing Director, FBN Capital Limited, a part of FBNQuest, Kayode Akinkugbe, who stated this, said the financing requirements are far much more than what the commercial banks can cope with, as the right segment of the financial market to fill the gap is the capital market.
He made this known as part of a panel on “The Nigerian Capital Market: A Catalyst for Change” during the 2015 Business Luncheon of the Capital Market Solicitors Association (CMSA) recently held at the Civic Centre in Lagos.
Speaking at the event, Akinkugbe stated: “Nigeria is at a point in its development where the issue of infrastructure has become extremely critical. Our infrastructure deficit requires us to invest around $30 billion a year for the next decade to catch up.” Akinkugbe explained, however, that strengthening liquidity in the capital market is very crucial, especially for confidence.
“If we have counter parties that have strong capital, there will be much more activity in the capital market. Currently, we really don’t have a lot of well-capitalised institutions. Being well-capitalised means you can make investments in distribution,” he said. He submitted that to make the investments that are required, properly capitalised institutions are needed. According to him, the nature of engagement of the capital market with the various stakeholders needs to be looked at. Akinkugbe said: “There needs to be a different model for engaging, particularly with the public sector. The way the bankers and the Bankers’ Committee, for example, have built relevance in the national dialogue and with the presidency is an approach that needs to be considered in the capital market community. Also, how we develop the buy- side in the country is critical, as the banking sector still dominates in terms of financial assets that are managed. We need to look for ways to try and mobilise savings by looking more to collective investment schemes for instance.”
From a regulatory perspective, Head, Legal and Regulations, Nigerian Stock Exchange, Ms. Tinu Awe, noted that there are three paradigm adjustments that need to be made within the Capital Market segment. “First, operators need to collaborate to challenge the status quo of the financial market. Secondly, regulators need to take a look at themselves and develop some sort of ‘regulators code’ to guide the execution of their oversight functions and finally, operators must show greater willingness to be regulated,” she explained.
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