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Nigeria’s economy in the face of electioneering

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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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Nigeria’s economy in 2019: Woes or fortune?

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As 2019 begins with hopes and aspirations, there are expectations from the federal government to better the economy with a view to making it have more meaningful impact on Nigerians. Here are the looks at the key indicators that will characterize the economy and determine its fortunes this year.

The economy appears to have lost its sparkle; its growth has dwindled. And there are palpable fears that the effect of political activities in the lead-up to the general elections, scheduled to commence on February 16, could overshadow whatever gains the economy may muster during this period, thus, compounding its woes. As it stands, the federal government has abandoned the economy for politics and the economy is already bearing the brunt.

After five quarters of recession, which the economy entered in the second quarter of 2016, having plummeted to a gross domestic product (GDP) growth rate of -2.06 per cent, the economy exited the quagmire in the second quarter of 2017 with a GDP growth rate of 0.55 per cent, which was revised upward to 0.72 per cent, according to data from the National Bureau of Statistics.

Then, the economy turned the corner as it grew at 1.40 per cent in the next quarter- that is, the third quarter of the year, and sustained the improvement recording a GDP growth rate of 2.11 per cent in the fourth quarter of the year 2017. However, in the first quarter and second quarter of 2018, the economy reversed the rising streak as evidenced in the slowed growth rates. NBS data showed that the GDP growth rate fell to 1.95 per cent in the first quarter of 2018 from the 2.11 per cent it achieved at the end of 2017. It dropped further to 1.50 per cent in the second quarter.

The agency noted that the clashes between farmers and herdsmen, which took its heavy toll on agriculture, mainly dragged down the growth rate during the quarter under review. Agriculture, being a major component of the non-oil sector was badly affected. However, with improvement in the non-oil sector, the economy received an impetus for growth, which pushed the GDP growth rate to 1.81 per cent. According to NBS, growth in the third quarter was largely helped by the non-oil sector, which contributed 90.62 per cent to the total GDP, while the oil sector contributed 9.38 per cent to growth in the review period. Oil GDP was reported to have contracted by -2.91 per cent compared to -3.95 per cent in second quarter and 23.93 per cent in third quarter 2017.

Despite the improvement in growth rate in the third quarter of 2018, the economy is still experiencing slowdown and was recently put on red alert of slipping into another recession over weak economic growth.

According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, who raised the alarm at a recent Monetary Policy Committee meeting, the economy may be under threat of relapse into a recession, which it recently exited from with fanfare, given the weak economic growth of the second quarter of 2018.

Emefiele also raised concerns about threat to efforts to curb inflation, stabilise exchange rate and build reserves, considering the macroeconomic fundamentals at the period.

The consumer price index, which measures inflation dropped from 11.28 per cent in September 2018 to 11.26 per cent in October 2018 and rose again to 11.28 per cent in November 2018, but when compared with the levels in the corresponding year of 2017, when it dropped from 15.98 per cent in September to 15.91 per cent in October and 15.90 per cent in November, it was not where the monetary authority had envisaged it would be. The apex bank has the onerous task of bringing inflation to its targeted single digit, especially in an election year.

Also, of note as a potential contributor to relapsing the economy into recession, as pointed out by the CBN governor, was the delay in budget implementation. A situation, where three months after presidential assent and about three months to the end of 2018, there was no budget implementation was unhealthy for the economy. According to the apex bank, long years of fiscal policy lag had contributed to the weakness in the economy. Most of the inimical factors identified by Emefiele at that time are still at play.

Given this scenario, as the New Year begins, economic managers have the arduous task of resolving those issues as well as ensuring the economy not only continues to grow, but also record appreciable and inclusive growth. While 2019 is an unusual year, being an election year, more, but critical efforts would be required by handlers to put the economy on a sure footing with a viewing to avoiding a relapse into recession.

The federal government has proposed a budget of N8.83 trillion for the 2019 fiscal year. Nigerians would not accept any excuse for delay in its passage and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonize their positions so that the appropriation bill could be passed into law and implemented in earnest.

The budget has been predicated on an oil-price benchmark of $60 per barrel. In recent times, oil prices have been sliding at the international market and currently stood around $54 per barrel. The falling oil prices have been identified as threat to implementation of the budget and as such, the relevant authorities would do well to peg the budget at the most appropriate benchmark.

As part of its strategy to mobilize revenue, the federal government through the ministry of finance, in July 2017, created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty, which was expected to rein in $1 billion from tax evaders and avoiders. By the end of the scheme, one year later, with only about N30 billion, the proceeds fell short of the government target, but the scheme was able to swell the tax database by five million to 19 million from 14 million. The government is expected to follow up on this initiative as well as intensify the revenue mobilization from more alternative sources than oil and borrowing to fund the budget. As at the end of 2018, the total collection by the Federal Inland Revenue Service was about N7 trillion.

Besides, the federal government is expected to review the power sector transition market policy performance this year after its first five years of implementation.

It is obvious that this present administration led by President Muhammadu Buhari, which is already pre-occupied with politicking ahead of the general elections, would not be able to solve the burgeoning unemployment problem. With unemployed Nigerians now at 20.9 million, having risen by 17.6 million in nine months, one of the major tasks before the incoming administration is to tackle the factors causing unemployment or to put it more aptly, provide employment opportunities in the economy and tame the rising scourge of unemployment.

Besides, Nigerians are anxiously waiting for positive outcomes from the talks, between the Nigeria Labor Congress and federal government over the N30, 000 minimum wage, that have resumed and are expected to be brought to a logical conclusion before the general elections.

 

Experts’ Views on the Economy

But in the view of the Chief Executive Officer of Financial Derivatives Company Ltd, Mr. Bismarck Rewane, political jostling and the elections would becloud the talks on the minimum wage. He also expressed the opinion that political activities and elections would becloud 2019 budget talks by the legislature and the first monetary policy committee (MPC) meeting in the month of January.

Also, in his projections, Director, Union Capita Market Ltd, Mr. Egie Akpata, posited that 2019 would likely be more challenging for the Nigerian economy than 2018.

According to him, most variables which were in the country’s favor last year, but not capitalized on, have reversed. “Oil prices, local interest rates, inflation, stock market indices, political environment and other variables that were positive for most of 2018 are now negative and will remain so for most of 2019.”

On the key areas that are likely to impact the entire economy, Akpata noted that in the aspect of government finances, it was unfortunate that for the federal government, tax revenues could be generated by threat or decree.

“The VAIDS programme fell far short of expectation and so did many other initiatives to diversify government revenues away from oil. These failures are not surprising. Individuals and companies have to be financially buoyant to pay a lot of tax. The reality is that most sectors of the economy are in a recession and profitability has been badly eroded.

“Self-inflicted damage from Apapa ports congestion, inability to solve the power crises, government crowding out the private sector in the debt markets, insecurity in large sections of the country amongst others mean that corporate profitability is unlikely to improve and hence better non-oil revenue for the government will take a while to materialize.”

Akpata added that, the federal and state governments had shown that they were unable to reduce their costs and instead had resorted to massive borrowing, particularly at the federal level.

This borrowing, he pointed out, was almost entirely to fund overheads. “Unfortunately, this produces very high market borrowing rates which very few private companies can afford. As long as the economy continues to have a risk free rate close to 20 per cent, it is unlikely that there will be massive credit to the private sector to drive the investment needed to grow the economy at the required levels.”

“Until there is a political force to stop government simply borrowing to fund overheads, FGN debt will continue to grow at an alarming rate. Since a default is very unlikely, the market will happily give the FGN all the debt it wants to pay its bills today. Repayment is largely a problem for future governments to worry about,” he also submitted.

He argued that the presented 2019 budget showed that “it is business as usual – unrealistic revenue targets, huge borrowing and waste on fuel subsidy. None of these are a positive for government finances,” stating that, the ongoing minimum wage battle with the NLC would likely result in some kind of wage increase, which will put more pressure on government finances.

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