Nigeria, Angola And Debt: Borrowing Big To Support The Budget In 2017

Kurt Davis Jr.
Written by Kurt Davis Jr.

It is the end of the year…the time of the year when companies close the books and forecast 2017.

As African governments roll out 2017 budgets or budget adjustments, it is the ideal time to take an early look at the two gigantic problem countries — sub-Saharan Africa’s second- and third-largest economies. A sustained low oil price could all but doom these African budgets and burden their economies.

Nigeria: borrowing big to support the budget

President Muhammadu Buhari presented the 2017 budget to the National Assembly on Dec. 14. Wrapping it in the theme “recovery and growth” as it is based on the country’s Economic Recovery and Growth Strategy, the president called the current economic situation the most challenging in Nigerian history. He called for diversification of the country’s fiscal and external revenue mix. This effort, according to the budget, focused on three things: making the country self-sufficient in several products to reduce imports; pushing exports of agricultural and manufactured goods; and building the support infrastructure to boost 2017 growth in roads, rail and electricity.

The support for a familiar rhetoric is present in the assembly. But looking deeper into the numbers, critics will find cause for concern. The 2016 budget, which was based on a $38 oil barrel price and 2.2 million barrels per day production benchmark failed to achieve intended results. Low oil prices and disruptions in crude oil production created shortfalls in revenue and growth. This budget projects $42.50-per-barrel oil price and a similar 2.2 million barrels per day production benchmark.

The budget assumes a 2017 fiscal deficit of 2.2 percent of GDP, underwritten by approximately $7.5 billion in borrowing (45-to-47 percent from external sources). The domestic market gives little indication of preparation to support the government’s debt appetite; nor does the insecurity in the Niger Delta support the production benchmark.

A too-ambitious infrastructure program could be confounded by a challenged currency and a likely overreach on oil production. President Buhari may have to find ways to assuage concerns of external debt markets. But low production, low oil prices and growing criticism will have their effects. Will debt markets be willing to service Nigeria?

Angola: spending to buoy the private sector

President Jose Eduardo dos Santos said he is prepared to step down — a ciao at an opportune time. Nigeria may steal the global discussion but Angola may be the giant taking the hardest punches. The economy is in a weak state with underlying data suggesting rougher times in 2017.

First, the decrease in imports symbolizes a big drop in economic activity. Secondly, we should expect the release of 2016 GDP data to be a slow process, especially as the International Monetary Fund looks to collect the data while also knocking at the door to provide a bailout. Angola leadership is not too keen to take the IMF’s bailout offering. Third, all estimates suggest that oil production will not meet the revised 2016 projection of 1.79 million barrels per day production of oil. Combined with the low price per barrel, revenues may be down 20-to-25 percent compared to 2015.

So what does this mean for 2017? The Angolan leadership is betting on a $44 billion budget based on 2.1 percent economic growth with an assumed 5.8 percent budget deficit. The budget projects a $46-per-barrel oil price in 2017. Oil revenues should be up as a result of price, which can be appreciated. But what has some analysts concerned is the expectation around non-oil revenue.

Non-oil revenue as a percentage of total tax revenue will be up but 10 percent may be too high a projection. This number dropped 18 percent from 2014 to 2016. The government also projects a 22 percent increase in spending on goods and services which indicates an effort to prop up the private sector. This combined with near 10-percent growth in interest spending will weigh on the larger economy. Toss in the IMF projection that Angola will end the year with public debt, including Sonangol, above 75 percent of GDP. The next president in 2017 could assume a volatile situation if oil prices slump as the government will automatically, similar to 2015, be forced to cut spending on the private sector and infrastructure and search for more debt. At such a point, the IMF may be last resort and the kwanza will surely feel some of the pain. Not a bad time to step off stage for President dos Santos.

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at