One Year Ahead Five Years Ahead
Risk Category Year
Political Risk 43.0 42.5 37.0 49.5 39.0 59.5
Financial Risk 47.5 39.0 36.0 42.5 30.5 47.0
Economic Risk 37.5 33.0 32.0 35.0 25.0 37.5
Composite Risk 64.0 57.3 52.5 63.5 47.3 72.0
Risk Band Mod High High  Mod V-High Low



Government Stability/Internal Conflict

Risk Shrouds the Elections

Africa’s most populous nation and its largest economy (contributing incredibly more than a third of sub-Saharan GDP) is about to stage presidential and national assembly elections on 28th March, 2015, having delayed six weeks owing to the security problems. They take place in the wake of a plunging currency, undermined by the negative oil shock and a presidential decider gearing up for a close fight pitching the incumbent Goodluck Jonathan of the ruling People’s Democratic Party (PDP) against Muhammadu Buhari, a former Army General and formidable challenger from the All Progressives Congress (APC). The APC was formed only in 2013 from the merger of several opposition parties and will also contest state assembly elections due to follow on 11th April, assuming there are no more delays to the process.

Jonathan with his running mate and vice president, Namadi Sambo, is struggling to gain the advantage in what is undoubtedly the closest national election seen since 1999. There is barely a hair’s breadth between the two contenders, each culling a 42% share of the vote in the latest opinion polls. Jonathan is a Christian in a country where sectional, religious and tribal divisions shape the politics, and has been weakened by the violence and economic problems that were brewing before oil prices on a downward slide magnified their gravity.

Few have benefited. The patronage and corruption defining the oil trade has failed to produce the trickle-down effect for Nigeria’s impoverished. Unemployment and under-employment are high despite programs to stimulate employment – including a new “jobs bill” timed for the election –made difficult by a large population of 170 million growing rapidly. The electricity sector has proved unable to cope with this growth. Outages are commonplace, despite state-led investments in independent power plants.

Buhari’s populist campaign message promising to address the power shortages, stamp out corruption, improve security, reduce poverty and iron out the electoral system’s failings plays well on the ears of voters disenchanted with Jonathan’s record in office. His strong personal image ensured victory over former vice president Atiku Abubakar in the party primaries on 10th December. Buhari’s selection was welcomed by Moslem supporters on both sides, not least because Jonathan ignored an unwritten rule in his own party denoting a rotating of the presidency between north and south reflecting the Muslim-Christian divide in an attempt to gain a second and final term.

Widening his appeal to the non-Muslim, southern areas of the country is crucial for Buhari’s chance of victory, and there is evidence he is gaining from real dissatisfaction with the incumbency. The president’s failure to stem the tide of terrorist violence from Boko Haram is crucial in that regard. The suicide bombings and kidnappings leading to more than 10,000 killed and 1.5 million displaced show little sign of relenting despite being met head-on by the Nigerian military, aided by counterparts in Cameroon, Chad and Niger joining forces to repel the cross-border threat of a brutal movement swearing allegiance to Islamic State.

The APC, in coalescing elements of the opposition, has successfully attracted disaffected members of the ruling party and is rivalling the PDP sub-nationally, presiding over more than a third of the state governorships – which it hopes to build on with this latest round of voting. However, the prospect of a close result signals problems down the line if supporters of either side sense a whiff of influence in the outcome. New biometric voting cards will go some way towards ensuring the integrity of the elections, helping to eliminate double-voting and ballot stuffing, but its usage in other countries has not always gone down well.

The real issue at stake, however, is Buhari’s austere reputation – a factor that is driving many to support him as an option for not only routing the Islamist insurgency in the north-east, but also for gaining control over the Christian warlords in the southern oilfield regions. Buhari is of Sunni Islam, Fulani heritage, and an inflexible character briefly ruling Nigeria with an iron fist following a coup in the early-1980s. His rise to power could prove to be an unsettling one for its divided population and for investors still eying the country’s undoubted longer-term appeal, as he seeks to re-establish national sovereignty.

The presidential contender is promising to crush Boko Haram in a major shift in defense policy that would remove high-ranking military officials patronized by the PDP, and is sure to spark unease in the ranks and a potential backlash. A military solution to the Islamist problem may in any event prove impossible without tackling its socio-economic and religious aspects. Besides, Buhari could inadvertently foment a fight on several fronts, which a weak and underpaid army may be in no position to deal with. A deal soon expiring between the present government and the Niger Delta militants halting attacks on oil installations is already pointing to the re-emergence of unrest in the south.

The Christian militants view Jonathan as one of their own and are poised to take up arms if he is not re-elected, heightening the security risks for foreign petroleum companies operating in the area where production is evidently threatened. Although around half of Nigeria’s economy is services-based, some four-fifths of the government’s budget revenue comes from oil extraction, with just four states involved in its production.

Any attempts by Jonathan’s supporters to block Buhari from an open victory could also deliver a violent response from his side, worsening the bloodshed occurring in the north and potentially splitting up the Nigerian state under a worst-case scenario. This in a country with still-incredible long-term ‘asset positive’ features stemming from its growing middle class and flourishing primary to tertiary sectors.

The elections may yet see further delays, either to the voting or the publishing of the results if they prove inconclusive, with the possibility of an interim administration taking charge or a military coup further heightening the short-term investor risks. The biggest obstacle will be to ensure the results are respected, especially if it is close given the logistical difficulties involved in conducting a free and fair process in the north-east where a visit from Buhari has spurred interest. Voter cards have been distributed there in an attempt to ensure the displaced can participate, but difficulties evidently remain.



Huge Problems Looming

The next government will face crippling financial constraints arising from the falling oil price and elections-related spending emptying the Treasury coffers. The non-oil fiscal deficit has narrowed over the years, but not at the pace required to compensate for this type of oil shock, meaning the consolidated fiscal position could deliver a deficit of more than 3% this year and an excess crude buffer fund sliding below $1billion to a tenth of its value three years ago. The government has thrice-revised its budget to factor in a more realistic oil price assumption now half the $100-$110 per barrel base used in previous years.

Fiscal constraints are creating huge state-level problems, with additional borrowings sought to ensure contractor payments and wages. State sector largesse causing a huge demand for foreign currency is, moreover, as much at fault for the naira’s plunge as the oil price decline. Corporations as diverse as retailers reducing their stocks, and estate agents insisting on dollar rental payments, highlight its wide-ranging effects.

Anecdotal reports suggest many Nigerian corporates are already enduring a major liquidity crisis, unable to pay for imports, and defaulting or at risk of defaulting on loans. Other unofficial channels suggest banking sector problems are being deliberately shrouded in secrecy until the elections are complete, contradicting the IMF’s latest review extolling a strong capital base.

Substantial job losses in the private financial sector and in the civil service are looming, along with cuts in fuel subsidies down the line. This is considered a necessity owing to physical oil theft and fraud in the oil marketing system undermining the state’s fiscal position, which with remediation runs the risk of causing hardship and social unrest.

The economy for now is bearing up in spite of the pressure on the currency resulting from the lower oil price and political risks, with bank credit growth driving the services sector and other parts of the economy. Crude oil production stepped up in the final quarter of 2014 to mitigate the price falls. Average daily production rose to 2.18 million barrels per day (b/d) from 2.15 million b/d in the third quarter.

However, reduced activity in the agricultural and manufacturing sectors were two of the main reasons for a slowing of the non-oil economy and a reduced pace of GDP growth measuring just 5.9% year on year, compared with 6.2% in the third quarter. Nigeria ultimately demands a faster pace of expansion to cope with its rapid development – poverty and income inequality are high and infrastructure development lagging – but real growth of less than 5% is penciled in for 2015 (with not much higher for non-oil activities).


Inflation Risk Rising

The currency lost almost a fifth of its value in the first two months of this year in spite of the government introducing new foreign exchange controls, closing the Dutch Auction System and unifying the foreign exchange markets (the rDAS rate and the interbank market rate). Unfortunately the currency decline was exaggerated by the US dollar’s new-found strengths and is likely to stoke higher price rises in the coming months, which have been fairly contained to date.

Consumer price inflation accelerated in January, but only to 8.2% year on year from 8% in December, which was still within the central bank’s 6-9% target band. Considering four-fifths of the nation’s resources are imported, and the naira was devalued 8% in November, this modest uplift will be welcomed by the authorities seeking to limit its social impact and its effect on business.

Food price inflation, partly affected by bottlenecks in production, and forming the largest share of the consumer price index basket, was kept stable at 9.2%. Yet other goods and services have seen price rises accelerate, and with the added bump from elections-related spending and the currency further devaluing it seems likely that inflation will exceed the 8.8% average for 2015 predicted by Nigeria’s National Bureau of Statistics, especially when higher import prices filter through.

The central bank’s options are limited, having already raised its benchmark interest rate from 12% to 13% in November to support the currency when the official corridor was widened from +/-3% to +/-5% and the naira devalued from NGN155/$ to NGN168/$. Godwin Emefiele, the governor since last June, surprised the markets with such a strong reaction at the time, but left to its own devices the naira was close to the symbolic NGN200/$ mark by mid-March 2015.

With more elections-related pressure on the currency expected over the coming weeks the central bank is unlikely to devote any more resources. Gross reserves exceeding $40 billion through 2013 fell to $34 billion last year, and in our judgement will slump to $25 billion or less in 2015, based on a halving of the price of Nigerian crude oil to $50 per barrel. Such projections, while sensitive to further negatives if the central bank utilizes more reserves or oil prices slide further, signal import cover diving from a comfortable position during the oil boom, to less than four months, and quite possibly below the three-month minimum recommended by the IMF. The current account surplus will continue to slide in response to the huge turnaround in the terms of trade and could conceivably move into deficit, heightening financing concerns.