Nigeria's Biggest Risks In 2019 - Emerging Market Views

Nigeria’s Biggest Risks In 2019

There are three major events are set to shape policy and overall momentum of growth in Africa’s largest economy in 2019.

Expectedly, the February 2019  general elections tops the list of those events.

Some 73 candidates are vying for a chance to lead the country for the next four years, although it could be a fierce battle between two dominant candidates- incumbent President Muhamadu Buhari of the All Progressive Congress (APC) and former vice-president, Atiku Abubakar.

Buhari, 75, says he will continue to fight corruption and expand his socialist intervention programs if re-elected.

Abubakar, 72, says he will focus on key economic reforms from ending a system of multiple exchange rates to selling part of opaque state oil company, NNPC, in a bid to revive an economy still reeling from the 2014 crash in crude prices.

The battle between the duo is expected to go down to the wire, with Atiku pushing the incumbent close, as arguments for a Buhari victory are not as strong as that of 2015 when the  former military dictator edged out then incumbent President, Goodluck Jonathan, in an unprecedented turn of events.

This implies that the margin for either of the two’s victory will be slim and anticipated vote splitting across religious and ethnic lines, given both candidates are Muslim and Fulani, doesn’t help and threatens to whittle down Buhari’s vote count.

The North West of the country handed President Buhari the victory in the 2015 elections, with a total of 7.2 million votes, 46% of his total votes.

Nigeria’s president Muhammadu Buhari.

In addition, Buhari has won all seven north-western states in the last two presidential elections (2011 and 2015) by comfortable margins.

“While we think President Buhari is likely to maintain his strong position in key states in the North West, especially Kaduna, Kano and Katsina, the 2015 margin may reduce considerably, say to between 65 to 70 percent, amid recent defections by political heavy-weights in the region, especially in Kano, Sokoto and Zamfara,” a team of United Capital analysts said.

“Again, President Buhari’s perceived push back of Boko Haram alongside his long history with the North East region, may support his chances, however, this will be deflated by the fact that Atiku is from this zone.”

High profile defections witnessed in 2018 from the ruling APC to the major opposing party (PDP) would also have an impact, albeit moderate, on the APC’s expected margin of victory in the North Western region, considering recent events in states such as Sokoto, Kano and Zamfara, in particular.

The defection of incumbent governor of Sokoto State, Aminu Tambuwal to the PDP could swing reasonable votes to the party’s flagbearer, given the Governor’s influence and popularity in a state which accounted for c.10% of the votes in the North West in the 2015 elections.

Similarly, Kano State (c.25% of 2015 votes in North West), the most populous northern state, is unlikely to be as much of a landslide for the APC as was the case in the 2015 elections, following the defection of former Kano State Governor, Rabiu Kwankwaso—an influential figure in the state, with a loyal following.

Finally, the division in the ruling APC in Zamfara State, (culminating in INEC’s decision to ban the party from fielding gubernatiorial candidates in the upcoming elections) may provide an opportunity for the opposition candidate to gain ground in the North West, according to investment bank, Cardinal Stone Partners.

“We highlight, however, that recent reports suggests some 10,000 Kwankwaso supporters and unspecified number of Tambuwal loyalists have defected to the APC,” a team of analysts at the Lagos based investment bank said.

According to them, the alleged developments will inevitably work in favour of the incumbent President Buhari, if they crystalize and cascade.

Buhari’s grassroots support in the North West has proven resilient over three election cycles, and many expect this to remain the same in the upcoming elections.

Stronghold states like Katsina and Kano and a majority vote in three other regions should be enough to see the incumbent through to victory in the polls.

That said, the raft of high profile defections certainly strengthens the opposition PDP going into the polls in February.

“We have seen that a victory is likely for the PDP, if they are able to gain ground in the North. This victory is possible even if APC retains victory in the same regions as in 2015. Conversely, the APC will need to consolidate its votes in the South West, while retaining its firm grip in the North in order to secure a second term for President Muhammadu Buhari,” Cardinal Stone analysts said in a note to clients, Friday.

Whatever the outcome of next month’s election, it is sure to take a toll on the economy of Africa’s most populous nation, in need of urgent reforms to grow sustainably and create sufficient jobs for its teeming people.

A possible change of guard at the office of the Central Bank Governor is the second biggest risk facing Nigeria.

The five year tenure of current CBN governor, Godwin Emefiele, comes to an end this June.

Although, the CBN governor is eligible for reappointment for another five-year term, no CBN Governor has returned for a 2nd term since 1999.

In the possible event that Emefiele doesn’t get the nod for a second tenure, it leaves the door open to another governor with the new ideas, one of which could be to end the multiple exchange rate practice favored by the current governor.

The CBN has kept its official exchange rate hovering at N306 per US dollar since 2017, while allowing the naira trade 18 percent weaker at the Investors and Exporters window introduced April 2017.

The CBN resorted to this strategy to satisfy the yearnings of foreign investors for a market-determined exchange rate while allowing it make special interventions to selected end-users at a lower rate.

While the change of tack has helped ease an acute dollar crunch that contributed to an economic contraction in 2016, the price variation is still a cause for worry for some investors who say they are often confused over the official rate.

Lack of critical reforms, post-election, and the direction of oil prices come in as the third biggest risk facing the country.

With the right reforms, Nigeria will be better placed to manage any oil price shock in 2019. The economy contacted for the first time in a quarter of a century in 2016 after oil prices bottomed.

Slow efforts to diversify the economy’s revenue stream means another oil price crash could leave the economy in dire straits.

Government officials have anxiously watched the recent movement in oil prices which fell below the 2019 budget benchmark, but is now showing signs of a recovery, climbing above the $60 per barrel budget benchmark Friday after falling to as low as $53 per barrel less than two weeks back.

An expensive petrol subsidy- which gulped some N2 trillion last year according to analysts’ estimates- and other anti-market policies need to be made way with, analysts say.

With the Federal government’s budget deficit tipped to hit N3 trillion this year, wasteful spending, could come under increased scrutiny.

Not only will key reforms impact government revenue it would also drive company profitability and propel the economy.

“If appropriate policies are implemented to address the risk factors in the economy, the earnings performance of quoted companies may show improvements in 2019 compared with 2018,” said Ayo Akinwunmi, head of research at FSDH Merchant Bank.

Nigeria’s economy continued on the path of recovery in 2018, although it failed to resonate with the wider economy as prevalent risks forced banks to cut lending and foreign investments stalled.

This year, consensus estimates point to a 2.2 percent GDP growth, meaning GDP per capita could slide for the fifth successive year as population growth outpaces economic growth.

According to Bismarck Rewane, CEO of Financial Derivatives Company, 2019 will be an interesting year with four distinct parts- fallouts of the election, post-election conflict, a focus on election policies and a likely currency adjustment by year-end.

“We expect petrol price to rise 25% to N176-N200 per liter while the currency will slide to N385-395 per US dollar,” Rewane said.

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