Investors Guide to Nigeria’s 2018/2019 Political Season

A 101 on Nigeria”s Political Season

The release of the timetable for the general elections by the Independent National Electoral Commission (INEC) usually signals the commencement of Nigeria”s political and election season. However, the 2018/2019 election season effectively kicked off in the first week of the year with the formation of a new political group by a senior cabinet member in support of a second term bid for the incumbent president. Nigeria”s political season could be quite engaging and intriguing, but the plots and features seem to indicate a sense of de javu about it.

One key feature that has now become political culture in Nigeria during the election season is the publication of epistles from key political figures. These letters often trigger a chain of reactions such as the creation of new political parties. Other features of the electoral cycle include the decamping and cross-carpeting by key political figures—which is also a fallout of the creation of the new political parties.

While the country”s constitution guarantees the freedom of association, a clause that has been further strengthened by a Supreme Court ruling, Nigeria”s current Fourth Republic has been materially weakened by the creation of new sets of political parties and the implosion of incumbent parties at every election cycle. This weakening is further accentuated by the disruptive effects it has on the institutionalisation of political parties which happens in three major ways. Firstly, as key institutions in the nation building process, political parties have to go through an evolution which can be painstaking and time consuming processes. However, by aborting the process mid-way (through jettisoning the old parties), the polity loses out in this germane formation process that political parties have to undergo. Secondly, it leads to the fragmentation of the opposition, which affects the capacity of this group to provide concrete and virile policy alternatives on strong platforms especially in the legislature. Thirdly, the frequency of decamping weakens the ability of these political parties to nurture their ideological identities. This seems to have the most devastating long-term effect on the political environment.

As a result of these factors, Nigeria”s major political parties have simply become conveyor belts with which politicians only use to seek and retain elective offices. Subsequently, these parties end up without an ideological input in the agenda of their political office holders. The sum effect of this political culture is that it leads to an erosion of long-term faith amongst the citizenry in the political class which has now been filled with an undue level of cynicism capable of inhibiting nation building. Overall, these political manoeuvrings largely result in distractions in governance that leads to an inertia in the implementation of macro-economic reforms.

Never Too Late For Macro Reforms

Figure 2 : The Five Principles of the ERGP

Source: ERGP

Macro reforms -especially deep structural reforms—often require a heavy drawdown on political capital. Consequently, these macro reforms—if poorly communicated—can result in significant political backlash especially in an election cycle. Thus, long-term followers of the Nigerian narrative understand the political cycle and its attendant effects on the macro-economic policy environment. However, the effects of having been averse to reforms especially in the 2017 window of opportunity—being the midway point of this administration”s four year tenure—implies that some tough reforms may be inevitable in this election cycle.

The pricing of petrol is probably the most germane macro risk lurking in 2018. The current rhetoric from policy makers indicates there”s a conundrum on the petrol pricing issue. Failing to deregulate when oil prices fell below $40 a barrel was a big miss. But even failing to divest from the refineries in the early days of this administration was an even bigger miss. Because tough decisions now have to be taken on these key issues at a less opportune time.

Nigeria will once again have to fritter away all the gains on the crude oil price rally if it fails to deregulate this time around. The alternatives to maintaining price controls on petrol at a time crude oil has surpassed the $60 per barrel mark will be either to resume the phony subsidy payments—and all the attendant malfeasance that come with a subsidy regime—or to grind the economy to a halt with fuel queues. Neither will be desirable.

Deficit funding will also require some bold reforms. These will include a combination of cutting recurrent expenditure and concurrently growing revenues. However, sale of assets also represents an important deficit financing tool.

Reforming in an election cycle will be a clear indication of the government”s faith in its key macro policy document—the Economic Recovery Growth Plan (ERGP), which provides for the sale of assets to serve as an economic stimulus and deficit financing tool. The ERGP identifies the refineries and other oil assets as some of the key assets the government will seek to divest from.

In addition, the concession of other key assets such as the major international airports in Lagos, Abuja and Port Harcourt should also stimulate capital inflows and drive long term efficiency in their operations.

Investors” Guide on how to play in these times

Figure 2 : FGN Revenue & Spending

Source: Agusto Consulting

The election cycles in Nigeria lead to an inevitable elevation of political risks in the country. These political risks tend to rise as the elections draw nearer leading to broad sell-offs by investors (particularly foreign portfolio investors). Thus, in the months to come (especially in the fourth quarter of the year), investors will possibly re-examine Nigeria”s risk profile and demand higher yields to reflect concerns over elevated political risks. The current Kenyan narrative further dampens investor confidence in sub Saharan Africa.

To mitigate these risks, the Central Bank needs to continue with its inflation targeting monetary policies. Thus, easing in the first half of the year may be premature, as yield hunters will demand a premium for the higher political risks triggered by the election cycle. The stability of the naira will also be a key driver of the carry trade. However, the fiscal deficit at over 3% of GDP and the uncertainty around the pricing policy on petrol will remain within investors” radar—leading to even greater uncertainty and further spiking macro risks.

The current debt management strategy of the Federal Government of Nigeria (FGN) has been to rebalance the debt portfolio with higher exposures to foreign debt while cutting on local borrowings. This has created some form of blip in the market as benchmark treasury yields on one-year maturities have dropped about 500 basis points from this time last year to between 13% – 14% now, and resulting in a negative real rate of return of about 1% – 2%. However, we believe that there will be some form of correction in the latter half of 2018 as yields will adjust to reflect risks levels from the macro and political environment.

In the interim, the drop in yields opens a significant albeit short window of opportunity for issuers seeking to raise fixed income debts. We do not consider the swapping of local debts for foreign debts as a sustainable long term strategy – thus, our conviction that there will be some form of correction to reflect risk levels. A viable long-term strategy will have to address the fiscal risks lurking in Nigeria”s deficit projected at over ₦3 trillion in 2018 alone. It is this deficit which largely goes on interest repayments (50%) and salaries and pensions (63%) that has led to Nigeria”s borrowing binge. This is Nigeria”s fiscal time bomb!