partner perspectives

Dec 9, 2016 | 16:03 GMT

11 mins read

Buhari's Change Puts Nigeria in Troubled Waters

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With each passing month after his inaugural in May 2015, many Nigerians became more apprehensive that President Muhammadu Buhari was too slow to kick-start his change agenda. As the popular saying goes, delay is dangerous. However, 2016 unfolded with further delays, notably in passing the budget.
In the course of the year, it became apparent that the lack of pace was just one of many shortcomings of the administration, which has also lacked a well-articulated economic policy. Collectively, its actions, inactions and delays in acting have all but wrecked the economy and upset the polity.

A difficult year

The indications were that 2016 will be a difficult year. Oil prices, which had started to trend downward since mid-2014, began a precipitous drop towards the end of 2015. This meant the outlook of oil prices would be subdued in 2016. Although oil accounts for roughly 15% of the GDP, the structural defects in the economy suggested lower oil receipts would have outsized negative impact on aggregate output.
Sensing the prospect of significant fiscal and monetary dislocations in Nigeria, the Managing Director of International Monetary Fund, Christine Lagarde, got on the plane and visited Nigeria early January. It is usual for the IMF to, on such visits, provide policy advice and indicate its readiness to provide a lending programme. Thus, Ms Lagarde counselled that the regime of capital controls that was taking root in Nigeria should unwind early enough. She also advised flexibility in managing the exchange rate.
However, her counsels were drowned in the pre-determined rejection of an IMF lending programme. President Buhari then bulwarked CBN's capital controls and the N197 peg to the dollar with his accustomed obduracy. This spelt trouble for the government that was planning a huge fiscal deficit, which was to be financed, in large part, by external borrowing. It also suggested investors will remain on the sidelines of the broader Nigerian investment market, following the selloffs in the equity and bond markets in 2015.
There were also concerns over the subsidy on premium motor spirit (petrol). During the recent years of high oil prices, the subsidy generated political acrimony apart from being mired in corruption. Government also often fell behind in making payment to product importers under the subsidy programme. But with oil prices trending around historical low levels at the beginning of 2016, acute government revenue shortfall was going to hamper continuation of the subsidy programme. The consideration of President Buhari that higher prices will hurt Nigeria's teeming poor was not going to prevent the final decision to remove subsidy.
An acute and crippling petrol scarcity that stretched over the months of February and March became the first reality check against the impracticality of government policies. Thus, in less than one week of signing the 2016 budget that was supposed to bring succour to the already squeezed masses, President Buhari on May 11th appeared to end the subsidy programme by increasing the price of petrol from N87 per litre to N145 in a feat of putative deregulation of the downstream sector of the oil industry. This move was bound to be inflationary, even as weeks of acute petrol scarcity was expected to be contractionary for the GDP.
Given the foregoing, the economic statistics that trended to November have been grim. Inflation rose from 9.6% in January to 18.3% in October. The economy contracted by 2.24% in Q3, deepening the recession that was confirmed by negative GDP growth rates of -0.36 and -2.06% in Q1 and Q2, respectively. As is notorious with a relatively lengthy and deep recession, businesses have closed down – while others are struggling, unemployment has, therefore, worsened. The IMF now expects Nigerian economic growth will fall to -1.7% in 2016, from 2.8% in 2015 and 6.3% in 2014.  

Failing politics

Internal wrangling in the ruling All Progressives Congress has provided the context to the failing economy. This was to be expected. The APC is older than the government by just a little more than two years. Moreover, all shades of characters had banded together under the aegis of the party to win the 2015 election by fielding a candidate that could garner votes but that was less assuring in governance. President Buhari then unfolded a winner-takes-all approach to governing, to the discomfiture of the coalition that propelled him to Aso Rock.
The APC government started to unravel quite early in 2016, revealing itself as a coalition of largely unprincipled entities. The National Assembly (NASS) welcomed South African President, Jacob Zuma, to address its joint-sitting on March 8th. This was regardless of President Zuma's growing ill-reputation in his country; the rivalry between Nigeria and South Africa; and that given the history of the rivalry, South Africa would not accord Nigeria's president the same honour. Three months after his address in Nigeria's hallowed legislative chamber, a South African court ruled that President Zuma must appear in court to face 783 counts of corruption charges preferred against him.
Indeed, members of the NASS have been embroiled in several wrongdoings. The Senate President, Bukola Saraki, was docked for falsifying his asset declaration while he was governor of Kwara State between 2003 and 2011. Accusations and counter-accusations continued to dog the leadership of the National Assembly over the “padding” of the 2016 budget. And the 8th National Assembly has been opaque with its remunerations, in the tradition of its predecessors.
The ultimate political dysfunction has been the anticorruption crusade of President Buhari. It has victimised mainly his opponents and members of the opposition party – People's Democratic Party – who failed to decamp to the ruling party. Members of the APC, who have not cleared their names on past malfeasances, have continued to nestle in the government and in the party.
Ostensibly for his anticorruption, President Buhari is abhorrent of the politics of oil production in the Niger Delta. He consequently whittled down the pragmatic policy of the amnesty programme of late President Umaru Yar'Adua, which was sustained by the administration of Goodluck Jonathan. Buhari's reticence to grasp the politics of Nigeria's oil was predictably problematic, not least because he – like previous leaders – was bankrolled into office with opaque campaign funding that links directly or indirectly to the country's petrol dollars. The backlashes to his grandstanding has been sabotage of oil installations in the Niger Delta, internal fracturing of the region, and the general distrust of the federal government by people in the region.
Some of the most influential leaders of the governing party have not only ditched the government, they now seem to want to thwart the continuation of the Buhari administration beyond May 2019. Former Vice President Atiku Abubakar has begun to actively promote his candidacy. The Ondo State gubernatorial election had President Buhari and APC's “National Leader” Bola Tinubu actively supporting different candidates. President Buhari himself has been drawn into the ongoing politicking ahead of the 2019 election. Although he has served only 18 months out of his four-year mandate, his media aide, Garba Shehu, said last month that Buhari will seek re-election in 2019.
The internal wrangling within the ruling party has widened political opposition to the administration. Governor of Ekiti State, Ayo Fayose, who has been the most vocal of the opposition politicians, signed into law on August 29th a symbolic, if not political, “Anti Grazing Bill 2016.” It was in response to the menace of the rampaging killing of locals in several parts of the country by the pastoral Fulani herdsmen. The country has remained outraged by the Federal Government's lack of effective response to the atrocities of the herdsmen who share tribal link with President Buhari.
In contrast, the agitation for political self-determination in the south-east by the Indigenous People of Biafra has been met with brutal force by the government. IPOB’s leader, Nnamdi Kanu, has remained incarcerated throughout the year. This is hardly a useful response to the challenge everyone knew Buhari would face in reconciling with the Igbos of the south-east who voted as a bloc against him in the 2015 presidential election.
Nevertheless, a standout achievement of President Buhari's politics in 2016 was the release of 21 of the abducted Chibok schoolgirls on October 13th. Not only did this assure on his steadfastness to the counter-insurgency against Boko Haram, it also provided some relief to the parents, the international community, and the Bring Back Our Girls campaigners. But with most of the girls still in captivity, and renewed killings by Boko Haram, there is much more the president would need to accomplish to fortify this important achievement.

Key market developments

The country is in its first economic recession in more than 25 years. As at November 18th, the main index of the Nigerian Stock Exchange had lost 10.84%, compared with its year open. Also, the value of the naira has fallen by as much as 130% in 2016, amid an acute forex shortage. The macroeconomic woes also include the rapid rise in inflation.
At the micro level, the banks have maintained profitability. Although loan impairment has surged to double-digit territory in 2016, compared to average 4.2% last year, systemic distress in the banking system remains a remote possibility. However, there were scary moments, like when the Minister of Labour and Productivity, Chris Ngige, threatened the licences of banks could be withdrawn if they continued to downsize labour. While the banks were able to shrug off the anti-market posturing of Dr. Ngige, amongst other head winds, some other sectors of the economy were not that resilient.
Manufacturing got a hammering by the capital controls of the CBN, its favouritism in the allocation of foreign exchange, astronomical rate in the parallel market, and the apex bank's high interest rate policy. A most notable exit from Nigeria was Erisco Foods Limited. The company said it could no longer continue operation in the country, given that the forex market was not a level-playing field. SMEs are generally struggling to withstand the harsh macroeconomic and operating environment, featuring high interest rate and acute power shortage.
The grand failure of policies in 2016 created challenges in virtually all the sectors of the economy. Government's failure to raise external financing for the fiscal deficit that was driven by the ambitious N1.58 trillion capital budget, even saw the construction industry contract by 6.13% in Q3. The plans to raise $4.5 billion foreign loans have yet to materialise, while a miniature version of the original N500 billion social investment programme for 2016 may finally get underway at the beginning of December.
By all standards, 2016 has been a bad year for dealmaking and investment in Nigeria. In August, Transcorp suspended its plan to invest $1 billion in Nigeria's power sector, due to dwindling gas supply from the Niger Delta. Oando continued to restructure and claw back from the brink, while it became unlikely that Dangote's refinery will be delivered on schedule, in spite of the preferential forex allocation the project enjoyed from the CBN in the earlier part of the year.
However, some important deals happened in 2016. Azura Power Holdings raised $876 million in January to construct a 450-megawatts power plant in Edo State. Olam commenced construction of $150 million ultra-modern animal feed mills, poultry breeding farms, and a hatchery in Kaduna and Kwara in April. And in a ground-breaking transaction in October, the Federal Government and Seven Energy signed a $112 million World Bank partial risk guarantee for the supply of natural gas to the 560MW Nigerian Integrated Power Project in Calabar.
In between these investments were acquisitions, which represented both ongoing rebalancing of risks as well as asset transfers to new entrants into the Nigerian market. Exxon Mobil agreed to divest 60% stake in Mobil Oil Nigeria to Nipco Plc, an indigenous downstream player. Suntory Beverage and Foods, a Japanese soft drinks giant, completed the acquisition of two beverage brands – Lucozade and Ribena – from GlaxoSmithKline Nigeria for N19.4 billion. Olam acquired Bua Group's wheat and pasta business for $275 million.

Looking to the New Year

2017 can hardly be too soon to come for Nigerians in practically all endeavours. Many would also wish the nightmares of 2016 would end with the year. Given this, we saved our outlook for 2017 for January. Happy holidays ahead.
Jide Akintunde is Managing Editor, Martins Hile is Executive Editor, and Chibuike Oguh is Frontier Markets Analyst at Financial Nigeria. Article was first published in Financial Nigeria magazine, December 2016 edition. 

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