Political Risk Analysis - Key Political Risks Could Derail Recovery - JAN 2018

BMI View : Despite the beginnings of an economic recovery, elevated potential for political instability continues to pose risks to our more positive outlook for the Nigerian economy. A lack of reform, political posturing in the run up to the 2019 elections, and rising tensions in the oil-producing south east all threaten the country ' s slow economic recovery over the coming two years.

Political risk will continue to threaten prospects for a gradual recovery in the Nigerian economy over the coming quarters. Although the economy only emerged from a five-quarter long recession in Q217, we hold a decidedly more constructive outlook for real GDP growth going forward on the back of increasing investment and production in the oil sector. However, a lack of economic reform, simmering tensions in the oil-producing south east, and potential for instability in the run up to the 2019 elections could each serve to derail this outlook. These risks are reflected in Nigeria's relatively poor performance in our proprietary Short-Term Political Risk Index, in which is scores 49.8 out of a possible 100, below the regional average of 53.3.

Nigeria Underperforms SSA In Most Components Of Risk Index
Nigeria & Sub-Saharan Africa - Short-Term Political Risk Index, Scores Out Of 100
Source: BMI

Expected Reforms Far From Guaranteed

Should the government fail to deliver the key reforms we expect in 2018, then economic growth would likely remain lower for longer. The two key reforms are a consolidation of the multiple exchange rate regime into a single, flexible rate and the passing of the Petroleum Industry Bill (PIB). While lawmakers have signalled their intention to give the final approval to the long-awaited PIB bill by Q218, we could see it again get held up in Nigeria's parliament, having already gone through several redrafts over the past 10 years. While the precise contents of the PIB will not become clear until the bill is actually passed, it will likely go a long way to improving the regulatory environment regardless - an important step in attracting foreign investment.

Similarly, while we believe the introduction of a free-floating exchange rate window (the NAFEX) as one of the central bank's multiple rates in Q217 is sign of a slow move towards a more flexible system ( see ' NGN: Central Bank Will Relax Controls On Official Rate In 2018 ' , October 23), this process remains highly politicised and it is possible we could see Nigeria's monetary authorities hold off from further relaxation of exchange rate controls. Delivering on these reforms would see Nigeria's economy slowly continue to improve as investor sentiment picked up. The naira's hard peg to the US dollar under the central bank's official exchange rate had limited liquidity in foreign exchange as demand for hard currency was kept artificially high by the naira's overvaluation. Moving towards a more consolidated and sustainable flexible exchange rate system will re-assure investors of their ability to repatriate any profits earned on their capital in Nigeria.

Security Environment Remains Tense

In addition to the potential political headwinds to much-needed reforms, Nigeria's economic outlook is threatened by a potential outbreak of violence in the oil-producing Delta region in the country's south east. A number of attacks on key pipelines carried out by the Niger Delta Avenger group saw crude oil output fall dramatically in 2016, contributing to the economic recession that year. Production in the hydrocarbons sector has since recovered on the back of an ongoing ceasefire arranged between the insurgents and Vice-President Yemi Osinbajo in President Buhari's absence. That said, tensions remain high and we cannot rule out a potential return to violence ( see ' Delta Discord Raises Risk To Stability ' , October 4).

Threat Of Violence In Delta Region Could Accelerate Production Decline
Nigeria - Crude Oil Production
e/f = BMI estimate/forecast. Source: EIA, NNPC, BMI

Discussions over a more long-lasting peace agreement between the government and insurgent leaders have recently shown signs of stalling as some combatants have become impatient with the former's failure to deliver promised amnesty payments. If talks do breakdown, then the ceasefire is unlikely to last, paving the way for a significant uptick in headwinds to oil production going forward. With crude oil accounting for over 90.0% of Nigeria's merchandise exports and over 50.0% of government revenues, this scenario entails downside ramifications for our wider economic outlook.

Buhari's Death Would Pose Further Risks

Finally, political instability and uncertainty will likely increase should President Buhari's ailing health force an early departure from office ( see 'Buhari's Death Would Not Be Major Threat To Stability', June 14). Nigeria's presidency has traditionally operated on an unwritten rule that power alternates between a northern Muslim and southern Christian. Should Buhari (a Muslim northerner) die in office, Nigeria's constitution would automatically transfer power to Osinbajo, leaving neither the Muslim nor Christian population feeling represented with a full term in office. In 2011 this led to an outbreak of violence between the two groups, a scenario we could not rule out in 2019. Even if Buhari made it to the end of his term, both the president and and Vice-President Osinbajo have ruled themselves out of contention or denied plans to run in 2019. This has left the question of Buhari's successor with no obvious answer, paving the way for policy uncertainty to act as a drag on investor sentiment over the next two years.