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Nigeria’s economy in the face of electioneering



Political risk has historically been the focus for domestic and foreign investors in the year preceding elections in Nigeria. It is often said to contribute to capital flight, instability of the local currency and a distraction from economic reforms. Systematic to most election cycles is some level of political instability amongst and between rival parties and in some cases violence, increased government spending skewed towards campaigning and winning the popular vote, often at the expense of capital expenditure and economic progression.

However, what is unclear is whether these factors alone account for the volatilities in foreign currency and capital markets in the run up to elections or whether the movement in Brent oil prices, Monetary Policy decisions in developed economies and other exogenous factors play a role.

To better understand the potential implications of electioneering and political risk on the economy as a whole here are the last five elections (1999, 2003, 2007, 2011 and 2015) diagnostic views of how the economy performed in relation to foreign investor participation.

1999 Elections – The First Democratic Election since Military Rule

The 1999 elections between Olusegun Obasanjo (PDP) and Olu Falae (Alliance for Democracy (AD) – a coalition between AD & All People’s Party (APP)) was met with skepticism by both local and international stakeholders given that it was the first democratic election since the military took over the helms of affairs of the governments in 1983.

Nonetheless, it was a contest between two candidates from the South Western part of the country, which many people perceived to be the case of soothing the pain of the Western part of the country following the annulled June 12, 1993 General election. Since it was an election between two people from the same tribe, the political risk may have been conceived to be less severe.

Obasanjo eventually won the election. On the economic front, while the U.S. Fed rate trended down to 4.75% in the midst of the Long Term Capital Management Hedge Fund crisis, oil prices were heading north, from a low of c.US$10/ barrel to US$26/barrel over the period.

However, oil production levels were falling rapidly, which may have contributed to foreign currency reserves sinking as low as US$4.7billion and the local currency weakening in both the interbank and parallel market by 20-24% to N105/USD. The decline in oil revenues, reserves and depreciation in the local currency may have contributed to the equities market falling by as much as 18% over the period.

2003 Elections – Elevated political risk

Unlike 1999, political risk could be said to be high during the 2003 elections, which was won by the incumbent President Obasanjo. The run up to voting was marred by violence, with several top politicians murdered; prominent among them was the assassination of key leader of the AD, Chief Bola Ige who was the serving Federal Attorney General and Minister of Justice.

This generated a lot of tension especially in the Western part of the country. On the global front, the U.S. Fed cut interest rates from 1.75% to as low as 1% as the U.S. economy struggled with the aftermath of the dot com bubble. It would also appear as though the Central Bank of Nigeria’s (CBN) decision to reduce interest rate were in line with the U.S. Fed’s timing.

Also, Brent oil prices gained as much as 52% over the period to US$30/b while domestic oil production inched up from lows of about 2mbpd to 2.5mbpd. On a negative note, foreign currency reserves fell by 27% to US$7.5billion with the Naira shedding 19% against the USD to N140/USD at the interbank market.

With this said, it would appear as though investors were bullish in the equities market, which may not be unconnected with the moderations in interest rates by both local and foreign central banks as well as improved oil revenues. As such, we believe the decline in reserves could have been the result of election spending as the macro economic conditions appeared strong. The sudden rise in headline inflation to a high of 11% in January 2003, from 5% in October 2002, and the steep rise in money supply, further supports this ideology.

2007 Elections – The Third Term Agenda

Political risk was also high during the 2007 elections with President Obasanjo attempting to run for a third term, which generated a lot of conflict especially from the National Assembly with allegations of bribery and corruption reported during the period. The President’s third term agenda also led to a personality clash with the then Vice President, Alhaji Atiku Abubakar, which further added to the political risks as elections drew closer. It is also worthy of note that the eventual President elect, Alhaji Umaru Musa Yaradua confirmed that the April elections had flaws and shortcomings.

In the U.S., the Fed gradually began moderating interest rates with GDP growth slowing as the credit crisis loomed. The CBN followed suit, reducing its own benchmark interest rate as headline inflation slowed. This, as well as high oil prices (up 55%) supported the Nigerian economy. Although oil production levels were volatile, foreign exchange reserves jumped 82% to US$52billion, which could have aided the appreciation of the Naira at the parallel market by as much as 17% to N122/USD. Furthermore, the change in money supply was fairly stable as inflation trended south.

Contrary to this, major economic indicators were positive while capital importation dipped significantly, falling by US$560million to a year low of US$220million in the month preceding the 2007 elections. However, as pointed out the equities market was very bullish, which was most likely due to the margin loans that fueled local investor participation.

2011 Elections – North vs South

Following the death of President Yar’Adua in 2010, the 2011 elections were mired by controversy within the ruling PDP as to whether a Northerner or Southerner should be allowed to contest the Presidential election. This led to agitations from the North on the belief that they were still supposed to be in power as the late President Yar’Adua did not finish his tenure.

Consequently, violence erupted in the region with the Human Rights Watch stating about 140 people were killed in political violence. This increased violence and political risk may have sparked capital flight as both the equities and treasury markets were relatively bearish. It may also have been partly induced by CBN’s hawkish stance and possible capital flight as capital importation slowed during the period.

Despite oil prices rising to US$117/barrel and oil production above 2.4million barrel, foreign currency reserves fell by 23% to US32.6billion. However, inflation moderated, which could signal that the drain in reserves may not have been the result of election spending but more in defense of the Naira, which lost 8% to N165/USD.

2015 Elections – Peaceful Transition

The 2015 elections were centered on increasing insecurity (Boko Haram) and economic strains. Buhari and the All Progressives Congress (APC) were viewed as more equipped to fight insecurity and corruption against the incumbent President Jonathan. The elections and the transition of power were both stable and peaceful. Although political risk was relatively low with no threat from external environment as the U.S. Fed maintained interest rates, the Nigeria economy was negatively impacted by falling Brent oil prices (down about 50%) despite oil production rising to 2.5million barrels per day.

Lower oil revenues, on the back of the decline in oil prices, government spending and capital outflows led to the slide in foreign currency reserves to below US$30billion and consequently the depreciation of the Naira to N197/USD at the interbank market. This and the uncertainty regarding the outcome of the elections may have contributed to the bearish sentiment in the equities market.

The Outlook for key parameters examined in past elections

  • US Fed is likely to remain hawkish while there is potential for CBN to shift to an accommodative monetary policy
  • Oil price to remain high (above US$70/barrel)
  • Oil production fairly stable at 2mbpd on stability in the Niger Delta
  • FX reserves could reach US$50billion with budget financing and oil proceeds
  • Expect headline inflation to trend upwards towards 12-13% levels on election spending

What does this say about the potential impact of electioneering on the capital and foreign exchange markets? 

From the analysis of the last four presidential elections, there appears to be a slight correlation between political risk and capital flight. However, the extent of this is dependent on the intensity of the elections and conflicts within the country. It is also worthy to note that exogenous factors such as decline in oil prices tend to exaggerate the capital flight, decline in foreign currency reserves and the slowdown in economic activities. 

While the political tension has gradually been escalating in the run up to the 2019 elections, we expect this to intensify as parties step up their respective campaigns and spending, particularly as we approach and move past the primaries in October 2018. Although there is a chance for an accelerated budget implementation particularly short term projects and recurrent expenditure, we expect electioneering to detract from much needed economic reforms to spur growth while we should see headline inflation trend upwards. 

2019 Election

The escalation of violence in the North between Farmers and Herdsmen could negatively impact food supply and inflation, as well as spreading to other parts of the nation. Although calm, the potential for a resurgence of unrest in the Niger Delta remains, which is key to oil production and revenues; and handling of Boko Haram insurgence could be even more delicate as electioneering intensifies.

However, what is clear is that we are already seeing a level of capital flight but this has largely been systematic to most emerging market economies as a result of ‘risk off’ sentiment by foreign investors due to concerns on geopolitical tensions, U.S. Fed’s rate hikes and trade war.

This contributed to the lackluster performance in the domestic equities and fixed income markets in Q2 2018 and Q3 2018 despite Brent oil prices remaining high, oil production levels improving, although volatile, and the nation’s foreign exchange reserves remaining above US$45billion. 

Even though the outlook for key economic indicators appears positive, there was further capital outflows in H2 2018, with an estimated US$9billion of local treasury bills held by foreign investors at the end of August 2018, due to uncertainty on the outcome of the elections.

The level of outflows could be amplified by increased violence in the North as well as an escalation of trade tensions in the global space. Nonetheless, it is expected that the accretion to reserves (+50% y/y) over the last 12months should aid the Central Bank of Nigeria in the defence and stability of the Naira amidst capital outflows as witnessed in recent months. 

Upside Risks

  • Oil prices continue to rise on Middle East tension
  • JP Morgan re-includes Nigerian government bonds in the emerging market index 

Downside Risks

  • Trade wars and geopolitical tension slowdown global growth
  • Oil prices crash on slowdown in global growth and higher production levels in US
  • Strong presidential candidate joins the election race.
  • Heightening uncertainty regarding outcome of elections
  • Faster than expected US rate hikes

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President Buhari’s Second Term: A chance to provide peace, prosperity, and security?



Nigerians re-elected President Buhari for another four years in what many have termed – a chance to make amends. In what could be called his third stint at the helm of affairs in Africa’s most populous country, questions about a coherent economic strategy are already being asked. In the last dispensation, protectionist posturing was worsened by a management style perceived to be distant while crucial decisions were delayed.

The economy is set to continue its recovery from the worst recession in its history. Nonetheless, the forecast is for economic growth to remain well below historic averages in the next five years. According to economic survey by Economist Intelligent Unit (EIU), Nigeria’s Gross Domestic Product (GDP) is set to reach $473.5bn in 2019 and rise to $680.9bn by 2022. This prediction will hinge, for the most part, on the current intensity of economic reforms and current rate of investment being sustained.


Background of the economy leading to election 2019

The Nigerian economy grew by 1.9% in 2018, an improvement from 0.8% recorded in 2017, with the non-oil sector being the fulcrum for the growth picture. Over the last quarter of 2018, the economy recorded a solid growth of 2.4% – with the expansion in the non-oil space (2.7% YoY) taming the contraction observed in the oil sector (-1.6% YoY). Dissecting the components in the non-oil territory, all subsectors expanded, with the services and Agriculture sector leading the pack. Notably, improvement in the number of active subscribers in ICT subsector coupled with mild support from transport drove the expansion in the services sector (3.8% YoY). Furthermore, while the Agriculture sector improved by 2.5% in Q4 18, it was disappointing compared to its four-year average of 3.8%. On the flipside, the oil sector dived into recessionary waters buoyed by low crude production (-2.6% to 1.91mbpd).


Declining Income per Capita

It is important to note that Nigeria has a huge population of over 180million and a population growth rate of 2.6% – higher than the 2018 GDP growth of 1.9%. GDP growth is projected to reach 2.0% and 2.2% in 2019 and 2020 respectively before rising to 3.2% by 2021. This means Nigeria would have had five consecutive years of declining income per capita – from 2016 to 2020. A burgeoning youth population is also unlikely to be matched by job growth, meaning unemployment – at over 40% – is likely to rise even further.

A breakdown of the GDP components show that Nigeria’s gross fixed investment, at $66.5bn, will account for just 14.0% of GDP in 2019. This pales in comparison to that of other notable emerging economies – Brazil (19%), India (27.12%), China (42.86%), and South Africa (18.7%). Majority of countries in the world have gross fixed investment of 18-22%. The EIU goes further to forecast that gross fixed investment in Nigeria will rise by just one basis points to 14.1% ($86.2bn) by 2022.


Why does this matter?

The importance of this component of GDP is that it is a clear indicator of the future productive capacity of the economy. The aforementioned basically means that the current and projected rate of investment is simply suboptimal and far below the level required to propel Nigeria to an accelerated growth path. It is incapable of providing Nigeria with the investment impetus that will have the desired multiplier effect on output. Nigeria has also grossly underinvested in its infrastructure. The existing infrastructure gap is estimated at over $300bn and requires 10% of GDP ($37.6bn)/annum over the next 10 years to bridge – an unlikely feat given that  current infrastructure needs are far in excess of current cash flows. Nigeria’s capital budget in 2018 was $7.98bn – 26.6% of total budget and 2.2% of GDP. This compares to 6% of combined GDP of emerging market economies. Nigeria’s share of emerging markets total spend on infrastructure is currently less than 1%.


Few options, Tough Choices

Nigeria’s high population growth rate means it must be much more efficient with economic policy. Putting Nigeria on an accelerated path to a free and market driven economy requires making tough game-changing decisions now. It will begin with figuring out how to raise the level of gross fixed investment to levels above and beyond the global average of 18-22%. Investment in the next 3-5 years will depend on policies and incentives.

Galvanizing domestic and international investment will be crucial. This will require a structure that incentivizes private investment considerably more than what is currently obtainable. Achieving this will require significant increases in public investment in infrastructure, in addition to more comprehensive and deep-seated market oriented structural reforms.


The Game changing Formula

Raising the level of investment in infrastructure given the government’s current revenue and borrowing constraints requires rethinking ways to attract private sector funding in the form of Public Private Partnerships (PPP). Outright sale and concessions of government assets– airports, seaports, inner city highways and trunk roads– should be a key consideration for policymakers.

Airports concession has the potential to lower the average cost for aviation operators by 50%. The government’s stake in the power distribution companies should be sold to the private sector while the power sector forbearance needs to be dealt with. The rail investment program needs to be accelerated while the road networks to major seaports need to improve.  Another item that is top on the list of reforms is the foreign exchange policy where a movement to currency convertibility with minimal intervention is paramount. Fears of a wild depreciation if the Central Bank of Nigeria lets go of its current policy of a managed float, are greatly exaggerated. The almost insignificant deviation between the parallel and the Investor Exporter Foreign Exchange (IEFX) window – which is closer to market equilibrium than the official rate – supports this fact. There is also the issue of fuel subsidy which has now taken the form of under recovery as the Nigerian National Petroleum Company (NNPC) now fully bears the brunt of the subsidy as the sole importer of Premium Motor Spirit (PMS). Deregulating the downstream sector of the petroleum industry requires the removal of subsidies, which will spur competition, bring about efficiency and increased investment in domestic refining – the lack of which has been a huge drain on Nigeria’s foreign exchange earnings over the years.  Not only is a game changing formula now imperative, it has become inevitable. Nigeria can continue at its current pace of reforms and investment – a recipe for chaos, social and political disintegration; or take drastic measures to raise public and private sector investment to levels that will accelerate productivity and economic growth.


Ending extreme poverty must be a top policy priority for Nigerians and the new government. The country has the capacity to deal effectively with poverty: large endowments of natural resources, especially oil; a young and highly educated population; and many people adept at entrepreneurship and the creation of wealth.

Nevertheless, there are many threats to the creation of wealth. Two of them stand out: widespread corruption and the absence of peace and security in many regions. Corruption, like embezzlement of public funds, has plagued Nigeria since independence. Buhari came to power in 2015 promising to clean up corruption and restore professionalism in the public services. Although he appears to have made significant progress in that fight, his critics say that he only targeted his political opponents and ignored his allies and supporters. Still, many Nigerians give him credit for his efforts and for not illegally amassing wealth for himself. To deal more effectively with corruption, Buhari must now significantly improve openness and transparency in government communication, especially with respect to government procurement programs.

The Buhari government also needs to deal with extremism and other threats to peace and security like Boko Haram and the lawless armed gangs who roam parts of the country kidnapping people and holding them for ransom. This must be done not just through military action but also by providing opportunities for young people, especially in the rural areas, for self-actualization.

Finally, the government must address the issue of lack of basic infrastructure for development: passable roads, adequate and reliable power, water treatment plants (access to clean drinking water is a major problem for most communities), basic health care, affordable housing (especially in urban areas), police protection, and other services that can enhance the ability of citizens to live in peace.

Posterity will judge Buhari and his government by how well they use the opportunity granted to them by Nigerian voters to make peace, security, and prosperity possible for their fellow citizens.

On the economic front, we expect resilience in agriculture sector and a recovery in the oil sector to be the key drivers for growth in non-oil and oil sector accordingly. In the non-oil sector, muted growth in ICT and in turn services as well as weak growth in Manufacturing due to depressed consumer wallet and delay with minimum wage bill, guides to slower growth in the non-oil sector of 1.3% YoY (2018: 2.0% YoY). In the oil space, the additional 200kbpd from the Egina oil field guides the expectation of an expansion in crude production over 2019 (2.06mbpd), albeit capped by OPEC cut. That said, it is expected growth in the oil sector to print at 7.1% (2018: 1.1%). Overall, 2019 growth estimate is forecast to 1.98%, a notch away from 1.93% recorded in 2018. For Q1 19, a slowdown in growth is expected to 1.3% YoY driven by a contraction in the oil sector (-1.1% YoY) and moderation in non-oil sector growth.

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