providing finance for optimizing 2012 budget

8/2/2019 Providing Finance for Optimizing 2012 Budget

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Paper presented at the

SOFEE Economic Conference

Presidential Hotel, Port-Harcourt

8th May 2012

By

Dr. Alex Otti

Group Managing Director/CEO

Diamond Bank Plc


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Outline

Budget Highlights Projected Impact on Macro economic variables Pillars of 2012 Federal Government Budget Fiscal Policy Direction in 2012

Value added by Financial Services Sector Highlights of 2012 Rivers State Government Budget League of State GDP Top 25% GDP Ranking, Federal and State Budgets Advantages

for Rivers State Recommendations for the State Diamond Banks support for 2012 budget Conclusion

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Budget Highlights

2012 2011

Crude Oil

- Price Per barrel $72 $70

- Daily Production (bpd) 2.48m 2.3m

Annual Revenue to FGN (Nb) 3,748 3,343

Expenditure Profile (Nb)

- Recurrent 2,432 2,423

- Capital 1,284 1,148

- Debt Service 560 495

- Statutory Transfers 372 418

Total Expenditure 4,648 4,484

Budget Deficit 900 1,141

Budget benchmark price per barrelof oil was increased to $72.

FG plans to increase production by65.7 million barrels of oil in 2012.

Annual Revenue accruable to theFederal Government is projected

to increase by 12.11% in 2012. Thisis driven mostly by anticipatedearnings from Oil.

Annual expenditure is projected togrow by 3.6% in 2012.

Recurrent expenditure, Capitalexpenditure, debt service and

statutory transfers accounts for52%, 28%, 12% and 8%respectively. Total share of capitalexpenditure increased from 25% ofbudget in 2011 to 28%.

Budget deficit of N900b isprojected for 2012

3Source: Federal Government of Nigeria 2012 Appropriation Bill

Debt Management Office2012 Budget Analysis by PriceWaterhouseCoopers


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Projected Impact on Macroeconomic Variables2012 2011

GDP Growth rate (%) 7.2 7.68

Inflation rate (%) 9.5 11.80

Unemployment rate (%) 23.9 23.9

US$ Exchange Rate (N) 155 150

Fiscal deficit (% of GDP) 2.77 2.96

Public Debt Stock (Ntr) 5.962 5,622

Debt/GDP ratio (%) 18.4 -

Required Deficit financing 900 -

Unemployment rate is not expected toimprove. The 100,000 jobs to be created byN50b reconstruction fund and YouWin arenot expected to change the rate;

Inflation rate target may not be achieved as

it has already climbed to 12.1% as at 31/03/12; Debt to GDP ratio of 18% is below the IMF

recommended ceiling 20% ratio fordeveloping countries;

Domestic public debt stock is expected toincrease to N5.96 trillion. The main concernis the portion of the budget used to servicethis rather than absolute volume which isstill considered sustainable.

The deficit of N900b is expected to befinanced by domestic debt. It is expectedthat Government borrowing will causecrowding out and affect private sectorinvestment.

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Source: National Bureau of StatisticsCentral Bank of NigeriaInternational Monetary Fund


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Pillars of 2012 Federal Government Budget

Macro Economic Stability-Debt to GDP ratio of not more than 30%;

-Reduction of recurrent expenditure ratio;

-Single digit inflation rate

Structural Reforms-Privatization of power sector in line with Powerroadmap unveiled in 2011;

-Reform in customs and ports management;

-Passage of Petroleum Industry Bill into law.

Strong Governance Institutions-Strengthen institutions and systems that promote

transparency; Investment in Priority Sectors

-Agriculture;

-Housing;

-Power;

-Education

-Transportation Infrastructure

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Source: 2012 Budget Speech by HE Goodluck Jonathan


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The Fiscal Policy Direction - 2012

2008 2012 excise tariff- Introduction of custom and excise tariffs to promote industrialization of the

country. Major duty waivers on machinery has now been introduced;

- Duty concessions and waivers to be granted on sectoral basis only wherenecessary;

- Concessions will be granted only where this will boost domestic production,export, developing value chains and boosting employment.

Personal Income Tax- Personal Income Tax Act of 2011 now signed into Law;

- Designed to reduce the average tax paid by low income earners and increasedisposable incomes available to them;

- Tax appeal tribunals has been established to fast track any disputes arising outof Personal Income tax administration

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The Fiscal Policy Direction - 2012

Export Expansion Grant- This scheme is to be reviewed and streamlined to make it more effective in the

promotion of non oil export;

- The scheme is expected to lead to diversification of the economy;

- The ECOWAS trade Liberalization Scheme will be reviewed to promote

regional trade.

Job Creation- Youth Enterprises with Innovation in Nigeria (YouWin) was launched to create

new generation of innovative real sector entrepreneurs who will generate Jobs

in the medium term;- Seed funding of N50 billion set aside for emergency construction and

rehabilitation of bridges, roads and other infrastructure. This is expected tocreate additional 100,000 jobs in 2012

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Priority Sectors for Investment Power and Energy- Ministry of Power puts current power generation at 4,400 Mw of electricity.

Out of this about 1,500 megawatts is lost due to gas shortages;

- Nigeria needs to generate and transmit at least 10,000 megawatts for it to have

any impact on its industrialization;

- The Power roadmap now being implemented is designed to create a robustpower sector through privatization of generation and transmission andattracting new private sector investment to power generation;

- A Bulk trader company has been created to intermediate between powerproducers and distributors in market making;

- Due to challenges with gas supply, partial risk guarantees has been introducedto give comfort to gas suppliers in respect of Payment.

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Priority Sectors for Investment

Agriculture- Overall goal of the new agriculture growth initiatives is to ensure food security forthe nation and encourage exports in agriculture value chain where the nation hascomparative advantage;

- Additional focus will be on putting in place incentives to encourage processes thatadd value to crops such as cassava, rice , oil palm, sorghum etc..;

- To encourage investments and flow of financing to this sector, a risk sharingframework between the governments and the banks is now in place. Highlightsinclude

- FG will guarantee 70% of the principal for all loans for supply of seed and fertilizer;- Interest rates on agriculture loans will be subsidized by the FG so that borrowers will pay

not more than 7%;

- Loans will now be available for the medium term rather than short term.

- With effect from January 31, 2012, import duties on machinery and equipment forthe agriculture sector will attract zero duty to enable investment in these bystakeholders.

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Infrastructure- To achieve the goals of Vision 20:2020, a total of N32 trillion is expected to be

spent on capital projects to provide critical infrastructure in power, transportetc. within the next four years. The private sector is expected to contribute N13trillion of this amount;

- Public Private Partnerships is an important vehicle to unlock funding for theseprojects with positive multiplier effects across the country.

Education

- Government will continue to invest to improve on the quality of education;

- Support Public Private Partnerships for skills acquisition and development

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Oil and Gas production capacity- Investments will be made to improve the oil and gas production capacity of the

country;

- Investment by domestic companies are necessary to ensure success of the LocalContent act of 2010;

- Petroleum Industry bill will promote transparent operations in the sector forthe benefit of all;

Housing- There will be a ramp up of investment in the sector to provide affordable

housing for all;- Public Private Partnerships will play a critical role if this is to be successful due

to the shortfall in housing stock;

- An urgent review of the land use act is necessary.

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Value Added by Financial Services Sector Agriculture- Banks have played an intermediary role under the Commercial Agriculture Credit

Scheme. From 2009 to March 2012, a total of N175.5 billion has been spent on 222commercial agricultural projects. Rivers State has accessed N4 billion from thisscheme as at March 31, 2012;

- Banks have taken a lead role under the shared risk agriculture scheme to providedirect loans to enable farmers buy seeds and fertilizers for this planting season.Interest rate will be pegged at 7%. Government will guarantee 70% of principal andsubsidize interest rate to ensure it remains at 7%;

- Banks will support agriculture further, by capitalizing on the duty waivers for

import of machinery to make available, asset finance loans to farmers to enablethem purchase critical machinery;

- Further up the value chain, there will be finance for the value adding process toagricultural output. This could include funding of factory constructions and

working capital needs.

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Value Added by Financial Services Sector

Housing- Banks intervention is expected in the area of support for Public PrivatePartnerships to increase the stock of affordable residential housing supply.

- Mortgage Banks abound to act as on-lending institutions of Federal MortgageBank in accessing loans to purchase homes;

- Illiquid nature of real estate investment can be solved through thesecuritization of these assets by banks.

Infrastructure and Energy- Value add by Banks will be in providing project finance funding for long term

projects and arranging syndications where this is necessary;

Oil Production Capacity- Banks can support domestic companies to seize business opportunities by

leveraging on the local content development act;- Funding should also be provided to domestic companies and IOC in their

exploration and drilling businesses.

Maritime and Customs- Developing products and services and an IT system that aids collection of

tariffs and duties will go a long way.

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Highlight of 2012 Rivers State Budget

2012Budget(NB)

Actual 2011(NB)

Budget Size 438 415

Capital Expenditure 324 264

Recurrent Exp. 114 85

Difference - 66

Revenue Profile

Fed. Acc. Receipts 261 333

IGR 63 66

Social Levy Receipts 2 -Previous Year Balance 12 32

Borrowing (Bond) 100 100

Primary areas of focus for the StateGovernment are Education, Powergeneration, Agriculture andexpansion/upgrade of roadinfrastructure;

Revenue is conservative as thegovernment has used US$60/barrel ofoil to estimate accruable revenuefrom federation account as againstUS$72/barrel in Federal Budget;

IGR plan declined by 5% from 2011.N63b IGR billion accounted for 19%of total revenue. This ratio lagsbehind those for Lagos, Delta andSokoto states; On the average Rivers

plans to collect N5.25 billionmonthly;

The state plans to draw an additionalN100 bi from the to N250 b approvedby the state house of assembly in 2011.

There are many common areas offocus between FGN and RSG.

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Source: Budget briefing by Hon. Gogo Levi Charles, Honourable Commissioner for Budget & Planning


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League of State GDP To 25%

GDP by Value GDP per Capita

State GDP 2011(US$m) RankLagos 41,464 1Rivers 25,944 2

Delta 20,620 3Oyo 19,848 4Imo 17,497 5Kano 15,257 6Edo 14,636 7A/Ibom 13,764 8

Ogun 12,890 9

State GDP/Capita 2011(US$) RankDelta 4,188 1Rivers 4,165 2

Lagos 3,829 3Edo 3,786 4Imo 3,702 5C/River 3,296 6Abia 3,142 7Oyo 2,955 8

A/Ibom 2,923 9

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Rivers state ranks second in both absolute GDPand GDP per capital in 2011;

These GDP statistics puts the state in poleposition to climb the ladder of development

As it attracts more professionals and companiesoperating in oil and gas sector, its GDP can growsignificantly;

Source: Projection made from 2008 figures found in Canback Global Income Distribution Database


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GDP Ranking, Federal & State Budgets Advantages forRivers State

Rivers State has exhibited high fiscal discipline in the past few years

There are convergences in Rivers State and FGN priority areas for investmentsin 2012 fiscal year. Collaboration and joint venture projects are the keys tooptimize spending; Possible areas of joint venturing includes Energy security for the state and federation

Education Agriculture

Improvement and expansion of Transportation infrastructure (road, rails etc..)

High GDP indicates active productive activities in the state. The state ispositioned to attract more people into the productive activities through Business partnering with citizens and residents to leverage on the local content

development act;

Providing state guarantees for business men to access financial products and servicesfor business.

The state can improve its IGR to total revenue ratio that is currently at 19%. Theration for Lagos State is 61%. This will need material improvements to itsrevenue collection and tax administration systems.

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Recommendations for the State

Consolidate on Oil and Gas related economy base/cluster. Encourageindustry inclusion by leveraging on Local content development act2010;

Continue to focus resources and systems towards the growth of GDP.This GDP growth should be managed in way that it also impacts on the

metrics measured in the well being index: Health. Education,environment, inequality in income, living standards, leisure andculture.

Continue to focus on provision of physical infrastructure such as power,road, housing etc.;

Align interests of state and federal governments. Develop effectiveeconomic strategies to promote growth;

Provide social and political infrastructures such as education,healthcare and security, strong governance framework etc.;

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Topic Ranking 2012Rank

2011Rank

Change

Starting a Business 116 108 -8

Dealing with buildingpermits

84 83 -1

Getting Electricity 176 176 -

Registering a property 180 180 -

Getting a Bank loan 78 75 -3

Protecting Investors 65 60 -5

Paying Taxes 138 109 -29

Trading Across Boarders 149 149 -

Enforcing contracts 97 98 +1

Resolving Insolvency 99 105 +6

Develop doing business in Rivers Stateindex to help attract additional industryclusters. Nigeria composite ranking incurrent global index is 133 out of 183.

8 out of 10 variables in the table arewithin the control of the stategovernment. It can work to improvethese and score higher than Nationalaverages;

Its main competitors for investment inthe medium term remain Lagos, Ogun,Delta, Akwa Ibom, Imo, and FCT Abuja.Competitive response should beconscious and deliberate;

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Doing Business in Nigeria Rankings

Source: World Bank, Measuring Business Climate 2012


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Rivers state has consolidatedits status as the Oil and Gashub of West Africa. Thiscluster should be deepenedto include all the sub

industries in the Oil and Gasvalue chain;

To optimize its potentials as aprime investmentdestination, it has to move todevelop additional businessclusters that plays up its areas

of comparative advantagesuch as Agriculture;

It can leverage on presence ofMultinationals in othersectors to build additionalclusters.

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Deepen existingclusters

Turn NicheProducts into

clusters

Build Clustersaround strong

MNCs

Develop RelatedClusters

Potential Clusters include but are not limited to Agro Allied industries Medium scale steel mills Information Technology Aquatic tourism Food processing

Source: Michael Porter, Creating a Competitive Nigeria 2009

Clusters and Economic Development


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Diamond Banks Support for 2012 Budget

Diamond Bank is a key partner to the people and Government ofRivers state since 1991 when our first branch opened in Trans

Amadi Industrial Layout;

Today, we have 11 branches in different parts of the state and

operate from over 220 locations nationwide; We have effective presence on the West African Coast and

operate from 4 countries;

Our first branch in a major European capital will soon open for

business; Our Public Sector Banking, Retail Banking, Business banking,

Corporate Banking and Structured Finance Businesses have overthe years offered services that are value adding.

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Diamond Banks Support for 2012 Budget

We possess expertise that have been and are relevant to the State: Our mortgage finance business is supporting the housing program

by developing a 106 units housing estate in Eliaparanwo. This hasreached an advanced stage of completion;

Our Corporate Banking business has deep expertise in financing

energy projects and is currently the lead funder for a power plant inAbia State Structured finance business has been recently reorganized to

provide advisory services to clients and play a leading role inarranging long term capital for project finance. This will be usefulPPP alliances of the state;

Transaction banking and collections business is able to restructurethe collection process for levies, taxes etc. and ensure improvedcollection.

We have a suit of products across retail and business banking thatwill suit individuals and businesses. I recommend you visit ournearest branch or go towww.diamondbank.com

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Conclusion

Both the Federal and Rivers State Governments budget arecapable of promoting growth if fiscal discipline is maintainedand the budget fully implemented;

The participation of the private sector through Public Private

Partnerships is a key driver for the success of both budgets. The intervention of banks is necessary to bridge financing gaps

for the different projects as well as offer advisory services to theGovernment;

Banks will need to seek out specific areas of intervention thatcreates the biggest impact in view of finite financing sources.

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Thank you

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providing finance for optimizing 2012 budget

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