Flash Note: X-raying the Budget of Change...How much can it achieve?

Transcription

1 Flash Note: X-raying the Budget of Change...How much can it achieve? Executive Summary One year into the transition from President Jonathan to the Buhari led administration, the burden on Government remained the need to rejuvenate the Nigerian economy which has suffered from the declining global oil prices, poor governance structure, sub-optimal fiscal crisis and monetary policy actions. Recent domestic macroeconomic numbers have suffered from both global and domestic shocks which currently threaten the economic fundamentals of the country. The recent data published by the National Bureau of Statistics (NBS) reflects the impact of the delayed budget passage as well as the weak monetary policy response on macroeconomic aggregates. The significant drop in government revenue and lower allocation to Sub- Nationals bites harder, pushing many States to the edge of a fiscal crisis with most unable to pay workers salaries for more than 3 months. However, many view the implementation of the 2016 budget as a catalyst for reflating the economy and resetting it on a growth pedestal. Key Considerations Socio-Political and Economic Background to the Budget of change Key Provisions and Assumptions of the 2016 Budget 2016 Budget Implementation and Fiscal Feasibilities Monetary and Fiscal Policy Implications According to the NBS, Real GDP contracted 0.36% in Q1:2016 dragged by declines in the manufacturing and key services sector components. Similarly, unemployment rate in Q1:2016 worsened to 12.4% from 10.1% in Q4:2015 as total number of people in full time employment decreased by 528,148 within the quarter and about 1.5m people joined the labour force. Inflationary pressures continued unabated rising to 13.7% in April 2016 (from the 12.8% in March 2016) due to cost push factors which impacted on most components of the Consumer Price Index (CPI). Thus, Nigeria s mystery index also rose to 24.9% in Q1:2016 from 20.0% in Q4:2015. Pressure on external reserves (declined 8.6% YTD) continued relentlessly despite controls introduced by the CBN. Parallel market FX rate has depreciated 24.0%YTD due to control measures in the official market. Thankfully, the Monetary Policy Committee (MPC) took a major move during the week in voting for the adoption of a flexible FX rate regime, though with a small window to cater for critical transactions. Nonetheless, the lack of economic impulse from the fiscal space for most of H1:2016 signals that the economy already nears a recession. The Buhari led administration sought to employ a new approach to budget formation and implementation in a bid to hasten infrastructural development and reflate the economy. The 2016 Budget adopted a zero-based budgeting system, a move from incremental budgeting system. Hence, the 2016 Appropriation Bill tagged the Budget of Change was characterised with cocktail of controversies leading to late passage and signing by the President. Nonetheless, the structure of the 2016 budget is a significant deviation from the previous years as the anticipated revenue was less tilted towards oil receipts (21.2%) and more skewed towards tax revenue as well as intensified efforts to reduce leakages across Ministries, Departments and Agencies (MDAs). On the back of the huge infrastructure deficit which has hampered growth and constrained business activities, the government increased allocation for capital expenditure from 11.0% in 2015 to 28.8% in Worthy of note is the special intervention programme on social safety nets (N500.0bn or 8.0% of total expenditure) to ensure an inclusive growth in Whilst we hold the view that the 2016 budget has the potentials to reflate the economy if properly implemented, the required funding of the budget for Ayodeji Ebo ext. 315 aebo@afrinvest.com Robert Omotunde ext. 314 romotunde@afrinvest.com Olawale Olusi ext. 318 oolusi@afrinvest.com Omotola Abimbola ext. 316 oabimbola@afrinvest.com Eronmosele Aziba ext. 319 eaziba@afrinvest.com Ibraheem Babalola ext. 321 eaziba@afrinvest.com Afrinvest Securities Limited 27 Gerrard Road, Ikoyi, Lagos info@afrinvest.com 1

2 optimal performance could be a drag. We note that the specific provisions for capital spending will boost infrastructure projects and investments while the recurrent expenditure would have a multiplier effect on private consumption expenditure component of the GDP. We think the fiscal deficit may exceed the 2.2% level projected for 2016 owing to pipeline vandalism which has lately hampered production. We see the recent liberalization of the downstream petroleum sector and the interbank foreign exchange market as a seeming synergy of fiscal-monetary policy synchronization, but amidst the various macroeconomic constraints, we ask; how much can the budget of change achieve? The Zero Based Budgeting System: How Effective? A significant deviation from past trends of traditional or incremental budgeting, the Federal Government adopted a Zero Based Budgeting (ZBB) System as this system allows for efficient allocation of resources based on needs and benefits rather than history. The ZBB system ensures that all expenses for the New Year are estimated on the basis of actual expenses that will be incurred and not on the incremental basis which involves just increasing the expenses incurred in the previous year at some fixed rate. In addition, the ZBB helps to eliminate unproductive activities by identifying more cost effective ways to channel available and limited resources. On the back of the need to justify every line item, ZBB incapacitates budget inflation. Also, it will enhance co-ordination and communication within the MDAs by involving them in decision-making. A significant deviation from past trends of traditional or incremental budgeting, the Federal Government adopted a Zero Based Budgeting (ZBB) System as this system allows for efficient allocation of resources based on needs and benefits rather than history. On the flip side, it is time consuming as the budget is evaluated afresh on a yearly basis. Moreover, it requires high manpower and frequent training of the workers as every line needs to be explained and justified. Overall, we view the adoption of the ZBB as a positive development which will increase the effectiveness of the budget. Against this backdrop, we expect improved budget implementation to snowball into a very positive results for the populace. The 6 Pillars: A Necessary and Sufficient Condition Figure 1: The Six Pillars 2016 Budget Source: Fed Mins. Of Budget & National Planning, Afrinvest Research In a bid to reflate and reposition the economy, the FGN has based the 2016 Budget on these six pillars; Economic Reforms, Infrastructure, Social Development, Governance, Environment, as well as States & Regional development. Economic Reforms: As Nigeria heads towards recession in H1:2016, there is an urgent need to come up with a well coordinate policy to avert a negative real 2

3 growth rate at the end of Despite a well-diversified economic structure, Nigeria s foreign earnings remain skewed to crude oil proceeds, hence creating significant distortion in the economy when oil prices wane. That said, further efforts are required to resuscitate the non-oil sector to stabilize foreign earnings. Moreover, both the fiscal and monetary policy actions need to sync which would improve the effectiveness of the 2016 budget. With the current stance of the CBN to adopt a flexible FX policy, we expect the manufacturing sector to rebound in H2:2016 as foreign currency liquidity improves. Also, we expect the government to increase its tax base as well as adopt more efficient revenue collection to assist in the financing of the budget. Infrastructure: Huge infrastructure deficit has continue to hamper growth in Nigeria. Interestingly, approximately 28.8% (N1.7tn) of the total expenditure was allocated to capital expenditure in 2016 relative to 12.0% in the approved 2015 budget and 5.0% at the end of Actually, the National Integrated Infrastructure Master Plan (NIIMP) has noted that Nigeria will need to spend US$25.0bn annually for the next 3 years in order to make material impact in developing its infrastructure. We however expect more effectiveness in the disbursement of funds to capital projects on the back of the newly set up efficiency unit. This is required to ease business bottlenecks as results from investments in power and transport begin to yield results. We also expect more Public Private Partnership in 2016 to support the funding gap for infrastructure. As part of the effort of the Ministry of Budget and National Planning (MBNP) to improve the effectiveness of the budget, it has revised the National Monitoring and Evaluation (M & E) framework to institutionalize the process of carrying out physical inspections and other verification exercises, as well as the impact assessment of policies, projects and programmes on a regular basis at the national level. We expect the manufacturing sector to rebound in H2:2016 as foreign currency liquidity improves More Public Private Partnership in 2016 to support the funding gap for infrastructure Social Development: The Social Progress Index as at measures the capacity of a society to meet the basic human needs of its citizens- Nigeria ranks 125 with 43.3 points. This obviously buttresses the need for social welfare package for the citizenries. In the 2016 budget, approximately N500.0bn has been earmarked to reflate the economy. This will cut across teachers, school children, students and market women as well as conditional cash transfer programme for 1million beneficiaries. In the 2016 budget, approximately N500.0bn has been earmarked to reflate the economy. Governance: After 55 years of political independence, Nigeria continues to contend with the challenges of good governance. However, hope was rekindled after the election of President Buhari last year to chart the course of the nation. Though his good intentions can hardly be questioned, Nigerians are yet to witness the anticipated improvement in the Nigerian economy. The full implementation of the Treasury Single Account (TSA) as well as Biometric Verification Number (BVN) for workers is bringing some sanity in the system and blocking the leakages. We suggest this should be taken a step further by legislating some of this steps, so it will be difficult for any new government to unwind these policies. Environment: Based on the 2016 Survey by the World Bank, Nigeria ranked 169 out of 189 countries attributable to significant hurdle experienced in starting a business, low access to credit, low tax efficiency and low trade across borders. The Government has set a 2016 target to move 20 places up in the Ease of Doing Business Rankings, by implementing fast track measures for business approvals and acquisition of land titles in addition to improvement in visa application and issuance process. State and Regional Development: Given the heavy dependence of states on federal allocation, the need for states to explore available opportunities and 3

4 improve their Internally Generated Revenue (IGR) cannot be over emphasized. We expect to see more regional collaboration for joint projects that would be of utmost benefits to the states. This will help attract more investments into these states hence increase their ability to earn more IGR through tax. State should also identify products they have absolute comparative advantage and make huge investment by adding value to these products as well as create incentives for investors. Major Highlights of the 2016 Budget of Change Figure 2: Budget Expenditure Highlights (2014 to 2016) Revenue Projections Revenue projections for the 2016 fiscal year budget signals a deviation from high dependence on oil revenues which has been the case for years, to a regime where independent and other non-oil sources account for a greater proportion of government revenue. The projected revenue for 2015 budget stood at N3.5tn. Oil revenue was projected to account for about 47.4% of the revenue, while nonoil revenue estimated at or N1.2tn with tax returns representing 35.2%, independent revenues (14.2%) and others (3.2%). However, looking at the actual performance of the budget, only 80.0% (N2.7tn) of the total projected revenue was realised due to distortions in daily oil production, which averaged 2.1mb/d as against an earlier assumption of 2.3mb/d, on account of pipeline vandalisation as well as diversion and theft of oil. Table 1: Key Budget Assumptions Assumptions Change Oil Production (m/bpd) % Crude oil Benchmark Price % Average Exchange Rate (N/US$) % Revenue Estimates Oil & Gas Revenue (N bn) 1, % Non-Oil Revenue (N bn) 1, , % Independent Revenue (N bn) , % Others (N bn) % Total FGN Retained Revenue (N bn) 3, , % Capital Expenditure Statutory Transfer Debt Service Recurrent Expenditure Source: Fed Mins. Of Budget & National Planning, Afrinvest Research Total revenue in the 2016 budget is projected at N3.9tn, an 11.8% uptick from N3.5tn in There is a clear shift from the usual practise in which Oil revenue accounts for a greater portion of revenue as only 21.2% of the total revenue for 2016 is projected to be realised from oil sources. This is unsurprising given volatility in the global oil market. Surprisingly, Independent revenue is projected to account for 39.0% (N1.5tn) of total revenue from 14.0% (N489.0bn) in Expenditure Provisions The 2016 budget has been dubbed the largest budget in the fiscal history of the country. The budget is projected at N6.1tn, up 20.0% compared to N5.1tn (inclusive of supplementary budget) in Also, there was a massive improvement in the proportion of expenditure allotted to capital spending, compared to 28.4% and 12.4% allocation in 2014 and 2015, 28.8% (N1.8tn) of total expenditure is anticipated to be devoted to investment in roads, transportation, power projects amongst others. A sector by sector listing of the specific projects and the planned spending is 4

5 presented in the Appendix Section of this report; we stored the information as the checklist to appraise the budget performance. Recurrent expenditure, is projected to account for about 43.7% (N2.7tn) of the total expenditure. One key development in relation to recurrent expenditure is the removal of subsidy payments and the previously used funds can be channeled towards other productive sectors of the economy. The budget also provisioned for a Special Intervention fund worth N500.0bn, 40.0% (N200.0bn) of which will be channeled towards capital projects while the N300.0bn balance will be channeled towards reflationary spending that will stimulate private consumption Budget Implementation and Fiscal Viabilities Following the passage of the 2016 appropriation Act which came about 5 months into the fiscal year, the critical question to ask is the extent to which the budget can be executed. Is 100% execution late and if late how late, more importantly are the revenue proposals of the budget realistic. To critically assess the fiscal feasibilities of the Budget we situate the key assumptions and provisions of the budget in the context of current macroeconomic realities. For instance, revenue projection is based on a benchmark price of crude of US$38.0bp, average daily production of 2.2mbpd, projected GDP growth of 4.3%, inflation rate of 9.8% and exchange rate of N197.00/US$1.00. Oil revenue is thus expected to contribute N820bn (21.2% to total revenue estimate of N3.9tn) compared to N1.6tn assumed for 2015 budget, while Non-oil revenues (including revenue from independent sources) will account for the balance. However, a critical assessment of key macroeconomic variable indicated that apart from global price of crude oil which has improved significantly, currently trading at US$48.8pb relative to less than US$35.0pb in 2015, all other key assumptions of the budget are largely at variance with current data. GDP contracted 0.36% in Q1:2016, inflation rate jumped to 13.7% in April 2016, the CBN is planning to realign its stance on FX rate to a more realistic level even as production disruption in the Niger-Delta continue to keep crude oil production below target. Hence we reassess the viability of the 2016 budget below. To critically assess the fiscal feasibilities of the Budget we situate the key assumptions and provisions of the budget in the context of current macroeconomic realities. Achieving the tax revenue estimate may be a tall order though the FIRS will strive to expand its tax base and widen tax net or embark on a more aggressive tax revenue mobilization to achieve its target Eyeing Larger Tax Revenue amidst GDP Contraction Non-oil revenues, comprising Company Income Tax (CIT), Value Added Tax (VAT), Table 2: Key Budget Assumptions S/N Baseline Assumptions Budget Actual Variance (%) Budget Outlook 1 Real GDP Growth 5.5% 2.8% -2.7% 4.3% -0.4% 2 Oil Production (mbpd) % Oil Price ($pb) % Inflation Rate 9.5% 9.7% 0.2% 9.8% 13.2% 5 Exchange Rate (N/$) % Revenue (N bn) 3, , % 3, , Total Expenditure 5, , % 6, , Capital Expenditure % 1, Fiscal Deficit/GDP Ratio (%) < 3% 1.6% < 3% < 3% < 3% Source: Fed Mins. Of Budget & National Planning, Afrinvest Research Customs and Excise Duties, and Federation Account Levies, is proposed to contribute N1.45tn (up from N1.2tn assumed for 2015 budget). However, the 2016 budget is predicated on a projected GDP growth rate of 4.3% and inflation rate of 9.8%. We think this is very optimistic when situated side by side the performance of the economy in the last 5 quarters. The recent Q1:2016 GDP number published by the NBS indicated a 0.36% contraction and this is expected 5

6 to worsen in Q2:2016. Also, inflation rate crept from single digit to double digit in February 2016, galloping to 13.7% in April. With structural challenges in the system, we project inflationary pressures to remain throughout the year. The economic implication of a contracting GDP and sharp rising inflation on revenue estimates is that tax revenue which is expected to contribute 37.7% (N1.4tn) will be constrained as lower output may weaken corporate earnings, taxable income, consumption spending and invariably the aggregate tax base. More interestingly, restriction of key import items as well as currency market crisis is expected to largely soften custom duties in 2016 though we expect some adjustments to this in the coming days as the CBN fashions out the workings of FX flexibility. Consequently, achieving the tax revenue estimate may be a tall order though the FIRS will strive to expand its tax base and widen tax net or embark on a more aggressive tax revenue mobilization to achieve its target. Tumbling Oil revenue, Outlook on Crude Production and the Niger Delta Avengers Average crude oil production target seems reasonable in our view given that production was only 0.1mbpd short of the actual in 2015 according to the ministry of Budget and National planning. Global price of crude oil has witnessed Table 3: Key Budget Assumptions Details 2015 Sep Change Oil & Gas Revenue 1, % Tax Revenue 1, , % Independent Revenue , % Others % Total FGN Retained Revenue 3, , , % Source: Fed Mins. Of Budget & National Planning, Afrinvest Research significant appreciation so far in 2016, rising from US$36.0/b in December 2015 to US$48.8/b as at 20th May, Nevertheless, improvement in oil prices had been largely driven by supply disruptions in Nigeria, Yemen, Canada and Libya despite increased production in Iran. While strengthening crude prices is positive for the treasury given a benchmark price of US$38.0pb, increased activities of militants in the Niger Delta, particularly the new Niger Delta Avengers on daily production portends a significant downside for the budgeted oil revenue expected to contribute 820.0bn (21.2% to total revenue estimate) compared to N1.6tn assumed for 2015 budget and an actual figure of N981.0bn as at September Much ado about Independent Revenue and Leakages Apart from Tax Revenue, Revenue from independent sources (operating surpluses of MDAs) is anticipated to contribute the bulk of non-oil revenue. Independent revenue is proposed to grow to N1.5tn (39.0% of total revenue projection) from N489.0bn approved in 2015 and N401.0bn in September The upsurge (207.8% jump in the operating surpluses of MDAs) is expected to be driven by aggressive cost-cutting efforts by the government while ensuring MDAs are run efficiently. According to the President, all MDAs are to present budgets in advance and remit their operating surpluses as required by section 22 of the Fiscal Responsibility Act. We think the proposed 207.8% jump in the operating surpluses of MDAs may be bogus given the historical contribution of the independent revenue to the 6

7 treasury over the years. However, we imagine that the Efficiency Unit put in place by the ministry of Finance to work on identifying and eliminating wasteful spending, duplication and other inefficiencies will go a long way in compensating for any short fall in the targeted N1.5tn independent revenue. Government Borrowing, Cost of Borrowing and Fiscal Deficit To finance budget deficit, FGN proposes an increase in domestic and foreign borrowings by 96.0% and 136.8% to N984.0bn and N900.0bn respectively in The remaining N334.0bn would be financed using recoveries from Misappropriated Funds. The domestic capital market can absorb the higher demand for capital by FGN although marginal rates at Bond auctions may tend to trend higher as was perceived in the May bonds auction. Complimentary monetary policy on the part of the CBN may however be expected to soften the possible crowding out effect on private sector borrowers. The domestic capital market can absorb the higher demand for capital by FGN although marginal rates at Bond auctions may tend to trend higher as was perceived in the May bonds auction. Foreign loans is proposed to be raised from multilateral sources with an infrastructure fund of US$25.0bn to cover a period of three years as well as the Eurobond market. Although the details of the President s visit to China is yet to be publicized, we think the key concern surrounding the plan to increase foreign borrowing by N520.0bn or US$2.6bn relates to pricing of the rates given the current perception of the domestic economy and its macroeconomic outlook. Lenders (especially in the Eurobond market) would likely demand a higher risk premium if macroeconomic risks persist. However, we believe recent move by the CBN to address the currency market crisis signals the turnaround in the perception of the domestic economy. In the face of potential threats on projected revenue sources, both form oil and non-oil fonts, we fear that the possibility of 2.2% fiscal deficit to GDP is in doubt as we expect that the government may likely increase its borrowing (domestic debt especially) to augment revenue shortfall. Policy Implications The 2016 budget may have been primed to improve domestic macroeconomic variables amidst the recent headwinds that have confronted the fundamental fabrics of the Nigerian economy, but the very assumptions of the budget seem to be threatened at this time, which brings into question the possibility of a significant budget performance. Budget seeks to achieve a 4.3% GDP growth rate, 9.8% inflation rate, 3.0% fiscal deficit, N197/US$1.00 exchange rate, 2.2mbpd oil production and US$38.00/b oil price. Budget seeks to achieve a 4.3% GDP growth rate, 9.8% inflation rate, 3.0% fiscal deficit, N197/US$1.00 exchange rate, 2.2mbpd oil production and US$38.00/b oil price. Consumption expenditure which contributes approximately 70.0% to GDP remains at its lowest ebb, investment expenditure is struggling to stay afloat while net export figures have also come in lower owing to weaker receipts from oil; thus government remains the major catalyst for growth. Chart 1: Multiplier of Government Total Expenditure on Total GDP Source: CBN, NBS, Afrinvest Research 7

8 All the basic assumptions have been disproved by the economic realities of 2016 so far given that GDP growth has contracted by 0.4%, inflation at 13.7%, parallel market exchange rate at N340/US$1.00, slower oil production at 1.4mbpd but with some form of recovery in global oil prices currently at US$48.8pb. Consumption expenditure which contributes approximately 70.0% to GDP remains at its lowest ebb, investment expenditure is struggling to stay afloat while net export figures have also come in lower owing to weaker receipts from oil; thus government remains the major catalyst for growth. Government total expenditure has been benchmarked at N6.1tn with the recurrent non-debt and capital components estimated at N2.6tn and N1.8tn while recurrent debt expenditure is estimated at N1.5tn. Reflating the Economy: In the very basic assumptions, the 2016 Budget is expected to be a reflationary budget that should help spur greater economic activities that would return the economy to the path of growth. Government total expenditure has been benchmarked at N6.1tn with the recurrent non-debt and capital components estimated at N2.6tn and N1.8tn while recurrent debt expenditure is estimated at N1.5tn. The reflationary components of the budget are the non-debt recurrent and capital expenditure elements which are capable of catalyzing growth when analyzed from the perspective of the multiplier effect it would have on the economy (GDP). We attempted to study the multiplier effect of Total Government Expenditures (TGE) over the years on the GDP and found out that in the last five years, TGE has an average multiplier effect of 18.1x implying that TGE in naira terms could have 18.1x multiplier effect on the GDP. The multiplier effect of total Recurrent Government Expenditure (RGE) on private consumption expenditure component of the GDP has a 5-year average multiplier effect of 23.5x. More importantly, the multiplier effect of total Recurrent Government Expenditure (RGE) on private consumption expenditure component of the GDP has a 5-year average multiplier effect of 23.5x while the average multiplier effect of total Government Capital Expenditure (GCE) on total private sector investment in the economy is 5.1x. The multiplier effect of N6.1tn 2016 budget on GDP is therefore not in doubt. But, the feasibility of 100.0% budget performance remains susceptible to stability in the key revenue and borrowing assumptions. We opine that the expansionary potency of the 2016 budget depends largely on proper fiscal discipline and optimal performance of the budget. We expect real economic activities to gain traction in the months ahead as we foresee the FX flexibility signal to attract both Foreign Direct Investments and Foreign Portfolio Inflows Debt Sustainability vs. Fiscal Consolidation: Amidst the shortage of government revenue owing to the plunge in global crude oil prices, the 2016 budget to a large extent is premised on large fiscal deficit which is estimated at N2.2tn or 2.2% of GDP. New borrowing is put at N1.9tn while domestic borrowing has been estimated at N0.9tn or 47.4% and external borrowing at N0.94tn or 52.6%. Whilst the debt sustainability ratios are still looking good for higher fiscal borrowing with estimated debt to GDP and fiscal deficit to GDP at 14.0% and 2.2% respectively, we are of the view that the time for fiscal consolidation (a concept that advocates for reduced fiscal deficits and moderation in debt accumulation) is not now given that the economy requires greater impetus that will spur growth. We opine that the actual fiscal deficit in 2016 may exceed the projected amount given the recent shortfalls in revenue assumptions which resulted in significant decline in daily oil production to 1.4mbpd from the estimated daily production of 2.2mbpd in the budget. However, we believe the domestic debt market has the capacity to fill the revenue gap as the bonds market continues to deepen amidst improved sovereign credit risk perception. Whilst the debt sustainability ratios are still looking good for higher fiscal borrowing with estimated debt to GDP and fiscal deficit to GDP at 14.0% and 2.2% respectively, we are of the view that the time for fiscal consolidation is not now. Monetary policy complementarity: There may have been delay in the passage of the budget, but monetary policy laxity has also accounted for slower pace of economic activities so far in the year. The recent decision by the Monetary Policy Committee (MPC) to allow greater flexibility in the management of exchange rate at the interbank market is a complementary step to budget performance that will help achieve growth objectives. In our view, we believe the flexible FX regime will truly reflect the dynamics of demand and supply of foreign currencies 8

9 and instill confidence in market players while also bridging the arbitraging gap which had hitherto existed and resulted into weak FX inflow into the system. We expect real economic activities to gain traction in the months ahead as we foresee the FX flexibility signal to attract both Foreign Direct Investments and Foreign Portfolio Inflows into the country even as local manufacturing companies find it less burdensome to bring in their inputs and critical productive machineries. Impact on the financial market and Investment sentiments: From our analysis above, government recurrent and capital expenditure have greater multiplier impact on the overall economy from private consumption expenditure and investments. Government spending thus will improve consumer spending, create jobs in the system, increase private investment expenditure while FX flexibility will assist in external balances as net exports gradually improves. The impact of all of these will be improved company fundamentals as revenue and earnings will lead to better sentiments for equities. We think the consumer goods, industrial goods, construction and the banking sectors of the NSE are well positioned to benefit from the budget. Similarly, the fixed income market will also benefit from the perspective of government borrowing as we believe that sovereign instruments will still continue to crowd out the private sector. 9

10 Highlights of Major Projects and their Fiscal Significance The list below comprises of highlights of the major projects proposed to be achieved with the 2016 Budget. It can also double as some sort of checklist to appraise the budget performance. Sector Project Cost (Bn'N) Dualization of Kano-Maiduguri road (Sections I-V) 13.0 Reconstruction and Pavement strengthening of sections of Benin-Sagamu expressway 8.7 Construction of Oju/Loko Oweto Bridge to link Loko and Oweto 14.2 Concession of 2nd Niger Bridge 13.0 Dualisation of Odukpani-Itu-Ikot Ekpene Road 6.0 Rehabilitation of Ilorin-Jebba-Mokwa-Bokani road 4.8 Road & Bridge Projects Power Projects Railway Projects Rehabilitation of Sokoto-Tabuwal Kotangora-Makira Road 8.8 Lagos Ibadan road (Section I) 40.0 completion of Gombe-Numan-Yola road phase II 2.8 Rehabilitation of Apapa-Oshodi-Oworoshoki Road 5.0 Dualization of Kano-Katsina road phase I 2.6 Dualisation of Ibadan-Ilorin Section II 6.0 Rehabilitation of Enugu-Onitsha Road 5.5 Dualization of Sapele-Agbor-Ewu Road (Section I) 2.0 TOTAL Construction of a 215MW Gas Power Plant 5.5 Construction of 2X60MVA Connection of Gurara to National Grid 1.2 Coal to Power development in Enugu, Benue, Gombe and Kogi 0.2 Completion of Ongoing Construction of ITC/TDN and Installation of Injection and Distribution Substations Completion of Small Scale Renewable Energy Power Plants Development 0.3 Generation of 700MW from Zungeru Hydro Power Project 1.1 Completion of Rural Electrification Scheme in 23 Communities in Ondo 0.3 Completion of Ongoing Electrification Project in Kano State 0.3 TOTAL 9.2 Completion Itakpe-Ajaokuta-Warri 326KM Rail Track and Structures 8.5 Completion of Abuja (Idu) Kaduna 186.5KM Single track Rail line 18.3 Nigeria Railway Modernization Project: Lagos-Kano Standard Guage Rail Line 60.0 Nigeria Railway Modernization Project: Calabar-Lagos Standard Guage Rail Line 60.0 Provision of Power, Water, Station building, Fence, etc for rail lines 3.2 TOTAL

11 Sector Aviation Projects Project Procurement and Illumination of Thales Navigational Aids at Kano, Jos, Minna, Maiduguri & Port-Harcourt Procurement and Installation of Airfield Lightening System at Port Harcourt, Kano, Lagos, Kaduna, Sokoto, Yobe, Akure Cost (Bn'N) Airside Rehabilitation of Nnamdi Azikiwe Airport, Abuja 1.1 Construction of Terminal Building at Enugu Airport Purchase of Calibration Aircraft and Equipment 2.0 Procurement, Illumination and Flood Lightening of 16 Airports 0.9 TOTAL 5.7 Construction of Hadejia Valley Irrigation Project 0.2 Supply/installation of pressurised/centre pivot irrigation system nationwide 0.2 Rehabilitation of Adani irrigation project 0.2 World Bank Assisted Urban Water Sector Reform Project 0.1 ADB assisted Rural Water Supply/Sanitation initiatives 0.2 Water Projects N1.2 billion for construction of Dam Embankment, Spillway, Inlet and Outlet Structures at Jare Earth Dam 1.2 Construction of Dam Embankment at Kashimbila Dam 1.5 Construction Dam Embankment at Adada River Dam 1.0 Construction of Dam Embankment at Ile-Ife 1.0 Construction of Dam Embankment at Galma Dam 0.5 Construction of 200nos. Solar Motorized Boreholes Nationwide 1.0 TOTAL 7.2 Housing Projects Construction of 1,973 blocks of 7,068 Housing Units in 6 Geo-Political zones and FCT TOTAL Construction of Rehabilitation of Rural Roads 1.3 Support to 187,500 Farmers 1.3 Agriculture Projects Extension Services 0.9 Development of Strategic Grazing Reserves 0.9 Price Stabilization/Buy-Back/Price Guarantee Scheme 0.9 TOTAL 5.4 Secondary schools quality assurance programme across 6 geo-politacal zones 0.3 Education Projects Statutory visitation and monitoring of 90 Federal tertiary institutions 0.8 Servicing ongoing and new local and foreign scholarships 2.1 TOTAL 3.3 Health Projects Vaccines, devices and operations programmes for Polio, Measles, Yellow Fever etc. Counter-part contributions for procurement and distribution of Antiretroviral drugs and contraceptive commodities TOTAL

12 Sector Special Intervention Projects Project Cost (Bn'N) 500,000 teachers and 100,000 artisans - N191.5 bn million children for 200 school days 93.1 N5,000/month for 1 million beneficiaries 68.7 Support for 1 million market women; 460,000 artisans and 200,000 agric workers For 100,000 students in Science, Technology, Engineering and Mathematics TOTAL TOTAL

13 DISCLAIMER This report has been issued and approved by Afrinvest Securities Limited ( ASL ), a subsidiary of Afrinvest (West Africa) Limited ( AWA ), a leading investment banking and financial services firm in Nigeria. This report is based on information from various sources that we believe are reliable; however, no, representation is made that it is accurate or complete. While reasonable care has been taken in preparing this document no responsibility or liability is accepted for errors or fact or for any opinion expressed herein. This document is for information purposes only. It does not constitute any offer or solicitation to any person to enter into any trading transaction. Any investment discussed may not be suitable for all investors. This report is provided solely for the information of clients of ASL who are expected to make their own investment decisions. ASL conducts designated investment business with market counter parties and intermediate customers and this document is directed only at such persons. Other persons should not rely on this document. ASL accepts no liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. This report is for private circulation only. This report may not be reproduced distributed or published by any recipient for any purpose without prior express consent of ASL. Investments can fluctuate in price and value and the investor might get back less than was originally invested. Past performance is not necessarily a guide to future performance. It may be difficult for the investor to realize an investment. ASL and/or a connected company may have a position in any of the instruments mentioned in this document. ASL and/or a connected company may or may not have in the future a relationship with any of the entities mentioned in this document for which it has received or may receive in the future fees or other compensation. ASL is a member of The Nigerian Stock Exchange and is regulated by the Securities and Exchange Commission to conduct investment business in Nigeria. 13