Government to borrow N8trn as Agusto projects 4% GDP

Agusto & Co. unfolded details of what it has seen in its crystal balls looking ahead for Nigeria and its economy and has projected that the country’s real output growth will be 3 – 4 percent in 2022, and that this will be largely driven by growth to be recorded in the services, manufacturing and oil and gas sectors, respectively. It also said the federal government is likely to borrow N8 trillion to cover shortfalls this year.

Agusto & Co. also said Nigerians will continue to spend the bulk of their earnings on food, rent, transport and telecommunications voice and data.

However, it pointed to some downside risks to the projection such as Covid-19 and its variants, which are likely to cause disruptions, though less, to business activities.

Reviewing the past year, it noted that, without a doubt, the year came with tough challenges that affected the operating climate for several companies in 2021, as Nigeria witnessed consistent improvement in business activities, evidenced by the positive GDP growth in the first three quarters of the year. At the core of the business environment, currency-induced inflationary pressures eroded profitability margins, while supply disruptions and insecurity dragged sales volumes for most businesses during the year.

At the virtual event monitored by Business A.M., the leading research and credit rating firm in Africa, noted that in 2022, businesses will need to grow their nominal sales by about 15 percent to keep pace with inflation. It said keeping up with the pace of inflation will be difficult for most as the real wages of consumers are unlikely to keep pace with inflation.

It also projected that the financial services sector will continue to hurt largely due to negative regulations – above normal CRR and negative real interest rates.

Agusto further said Nigeria’s federal government will borrow another N8 trillion in 2022 to augment her spending while obligatory spending (interest on loans, statutory transfers and payroll & unfunded pensions) will total about N11 trillion.

It added that the bulk of the remaining funds will go to capital expenditure which it estimates at not more than N3 trillion. To this borrowing, the local currency debts of the federal government will grow to about N44 trillion or about 9X of her revenues.

“Because of the high cost of servicing these debts at commercial rates, the CBN will continue to accommodate the FGN by lending to them at rates below inflation, thus reducing FGN’s borrowing requirement from the markets and put downward pressure on interest rates as banks, pension funds, insurance companies and other institutional investors compete for government securities.

“The average yield on FGN’s 10-Yr. US dollar bonds was 7.1 percent in 2021 compared to 1.4 percent for those issued by the government of the USA. This translates to a Country Risk Premium of 5.7 percent. We believe that this risk premium will be about 5.0 percent in 2022 as fears about Covid-19 recede and the fact that Nigeria has ample resources to service her FCY debts. However, this premium may spike if there is a flight to safety by investors,” Agusto noted.

Lending its views to the exchange rate situation, the indigenous credit rating firm said dual exchange rates will continue in 2022 as the CBN will use improved oil and gas export revenues and maybe some of the external reserves to shore up the NAFEX rate which it estimate will close the year at about N430/$1.

“There will be continued pressure on the NGN/$ rate in the parallel market. Unless the CBN injects some dollar into this market to dampen the pressure, closing the Naira to dollar exchange rate in this market will be about N610/$1.

“It is unlikely that the CBN will allow significant currency depreciation in an election year and one in which oil & gas export revenue is likely to rise by about 15 percent. Therefore, we believe that the official NGN/USD exchange rate will be about N430/$1 at the end of 2022.

“A close to 10 percent point difference between the NGN inflation and the USD inflation will continue to put pressure on the parallel market exchange rate. However, the CBN may dampen the impact of this by injecting some USD into the parallel market. We expect NGN/USD to be about N610/$1 at the end of 2022 in the parallel market,” the company stated.

Elaborating on the economy and households and businesses, the firm, led by Olabode Agusto, projects that real GDP per person will remain flat below the N383,000 level for 2015 as population growth consumes the bulk of the growth in real output as nominal wages will see a rise by about 10 percent but real wages will continue to drop and unemployment will continue to rise. For the businesses in the real sector, they will record growth in their revenues at rates close to the inflation rate but businesses in the financial services sector will struggle to do this.

“Corporate profits (measured by ROE) should improve in 2022 but for most businesses, this will still be below the cost of equity which we estimate at about 27% for 2022. Valuations may rise on account of improved performance.  Businesses in financial services will continue to hurt largely because of negative real interest rates and negative regulations. Valuation of businesses in the sector will be impacted negatively.”

For the banking and financial sector, Agusto pointed out in its forecast that, “The banking industry’s LCY loans will grow by about 10 percent in nominal terms but growth will still be negative after adjustment for inflation. Loan growth will continue to be constrained by above normal cash reserve requirements. Banking industry profitability will remain weak because of a high level of non-earning cash reserves, continuation of the AMCON levy beyond the ten years initially agreed and higher effective tax rate.”

Nonetheless, forecasts for key macroeconomic variables for the Nigerian economy from various experts indicate a continuing rebound in growth recovery expected in 2022 on the back of continued support by both monetary and fiscal policy, sustained high crude oil prices and most importantly, availability of COVID-19 vaccines as well as high turnout for vaccination in Nigeria.