Outlook for the Nigerian Economy in Buhari’s 2nd Term

The Economy: Outlook is positive but modest

The outlook for the economy over the next 4 years is positive but modest as President Buhari’s victory signals policy stability. Clearly, the administration will continue to invest in infrastructure, sustain its welfare scheme, reinforce the drive to substitute imports for local production, and retain its intervention programs across the Agric, Power and the SMEs space, by building on its Economic Recovery and Growth Plan (ERGP). As such, we expect the budget to remain large, broadly financed by borrowings. However, the role of the private sector may be limited by the absence of far-reaching liberal policies. This may keep investment low, and output growth soft. Accordingly, we expect GDP growth to sustain a gradual uptick over the next four years, rising from 2.0% to 3.5% or more over the period. Inflation rate is likely to ease 10%/9%, though minimum wage implementation and power tariff adjustment may weigh on prices. Thus, the interest rate may to revert to its long term 12% over the period. In the rest of the report, we highlight our views of the medium-term economic outlook for Nigeria.

CBN, Monetary Policy and Regulation of the Banking Sector

On FX, we imagine the possible sustenance of the current fixed/multiple FX regime by the CBN considering the President’s view of a strong currency. However, a lot depends on the leadership of the CBN as the president may or may not renew the tenor of the current CBN governor, whose first term ends in June 2019. If retained, Governor Emefiele may sustain the current FX regime by retaining his demand management policies on FX sales (via the exclusion of item considered not eligible for FX sales). Also, support programs in the Agric Sector via the Anchor Borrower Program will be sustained. On monetary policy aggressive liquidity mop-up via persistent OMO issuances may be retained considering that FX rate will broadly drive policy actions.

Nevertheless, history points to a higher likelihood for the appointment of a new CBN governor. In the last 20 years, no CBN Governor has been returned for a 2nd term in Nigeria. Additionally, the position seems to have rotated across the four major geopolitical regions of the country in the last 20 years (Dr. Joseph Sanusi (S/West) 1999-2004, Prof. Charles Soludo(S/East) 2004-2009, Sanusi Lamido – HRH (N/West) 2009-2014, Governor Godwin Emefiele (S/South) 2014 till date). Hence, we anticipate a replacement for Mr Emefiele by Jul-19, possibly from the S/West or the North, if the traditional rotation continues. More importantly, professional background will play a prominent role in determining who becomes the next CBN chief. Our best guesses for likely replacement of Mr Emefiele include Dr Adesola Adeduntan (MD CEO, FBN Ltd) and Mr Bello Maccido, (Fmr-CEO FBNH/Chairman, FBN Quest). Other possible candidates include Aishah Ahmad, who recently became the Bank’s Deputy Governor and Mr Herbert Wigwe (Ex-Access Bank CEO). Overall, the direction of monetary policy and the stability of the financial system will, to a large extent, depend on the economic views and policy inclinations of the next CBN governor.

Anti-Corruption War and the Economy

The administration’s efforts to stamp-out corruption will be sustained and the EFCC will continue to clamp down on looters and individuals with allegations of misappropriation of public funds. Over the last three to four years, the implementation of TSA, Whistle blower’s policy and the efficiency unit of the Ministry of Finance, by the administration has supported significant improvement in independent revenue and recoveries. While this will remain appealing to the poor masses, it may rein in discretionary spending by the elite, ultimately limiting the growth rate of aggregate spending in the economy, especially on activities in the services sector.

Security & Social Political Environment

A major aspect of the socio-political environment that seems to have benefited a lot from President Buhari’s 1st 4-year is the war against insurgency. If the voting pattern from the region is anything to go by, the massive re-election of the President by voters in Borno and Yobe (the most affected States) suggests that the perceived containment of Boko Haram activities by the Buhari government is paying off. Hence, we imagine that another four years in office is positive for relative peace and security in the North Eastern region of the country. Notably, the President was also very stern on the Biafran agitators, considering his successful suppression of the uprising. The Administration also contained the Niger/Delta militants, thanks to the negotiating efforts of the Vice President. The only concern is the herders/farmers crisis, as the President was perceived to have been somewhat soft on the issue.

Notably, the President was also very stern on the Biafran agitators, considering his successful suppression of the uprising. The Administration also contained the Niger/Delta militants, thanks to the negotiating efforts of the Vice President. The only concern is the herders/farmers crisis, as the President was perceived to have been somewhat soft on the issue. However, the herder/farmer crisis has shown significant improvement over the last 5 months, with a marked impact on Agric sector output, hence we are more optimistic going forward. Overall, improvement in social security is positive for activities in the Agric sector of the economy, which has been most impacted by the menace.

Economic Reforms

Beyond elections, the medium to long term outlook for the Nigerian economy depends on the position of the government on the implementation of far-reaching economic reforms to fix the structural challenges in the economy. If not urgently addressed, structural constraints such as; the enormous infrastructural deficit, poor electricity supply, sharp rising population growth, dependence on oil export and oil revenue for budget funding, and the problem of the viability of sub-national governments, are bound to mar economic progress. Notably, system inefficiencies continue to undermine the ability of the federal government to diversify its revenue base, enhance social justice, allocate resources efficiently and drive economic diversification. If the stance of the current administration over the last four years is anything to go by, we do not envisage a significant drive for bold reforms. However, we expect investment in infrastructures such as rail project, road, and similar social amenities to continue in a bid to bridge the infrastructural gap. Again, the drive to diversify government revenue via improving the efficiency of tax authorities such as the FIRS, Customs and Ports Authorities, and support the SMEs boost job creation through intervention in the Agric sector will continue. Finally, efforts to ease doing business in Nigeria, via the initiatives of the Presidential Enabling Business Environment Council (PEBEC), by reviewing the bureaucracies and red tapes within the civil service and other government agencies, should be more obvious going forward.

Oil & Gas Sector

Earlier, the Buhari administration launched the “7 Big Wins’ with priorities to stabilize the oil & gas sector and improve transparency, cost efficiency, investments, as well as security. Nevertheless, a review of the performance of the sector suggests that so much remains to be done. Notably, the Petroleum Industry Governance Bill (PIGB), one of the four parts of the Petroleum Industry Bill (PIB), designed to improve regulation, efficiency and boost transparency, was passed by the national assembly to the President in 2018. However, this was not signed into law by President Buhari due to concerns with the documentation of the bill as passed by the national assembly. With President Buhari’s victory, we expect effort to boost the efficiency of the Oil & Gas sector will continue, with the President himself as the Minister of Petroleum. Our most optimistic view is a possible passage of PIGB down the line. The privatization of the NNPC is unlikely but we expect the drive to improve its efficiency to be sustained. Nonetheless, we anticipate the opening of the Dangote refinery before the end of his tenor.

Power Sector Reforms

Despite the government’s commitment to improving power supply in Nigeria, the sector remains visibly challenged. Metering of end users remained one of the biggest challenges bedevilling the industry across the value chain as 3 of every 5 registered end-users remained unmetered. This continues to create a vicious cycle of poor revenue collection efficiency, high billing rate and liquidity crunch across the sector. Despite recent efforts to boost metering, following the approval of the Meter Asset Providers (MAP) regulation in 2018, the total number of metered electricity users stood at 42% of the total 8.1million registered electricity customers in 2018, according to NERC. To support liquidity, CBN-funded Payment Assurance Guarantee (PAG) worth N701.0bn was set up to cover the shortfalls of Nigerian Bulk Electricity Trading Plc. (NBET), targeted at GenCos and Gas suppliers over a 2-year period. Going forward, we imagine the possibility of further intervention in the sector by the administration. As such we do not see any major reform in the sector. However, this may also go with a possible adjustment of the electricity tariff in the short-term to further reflect the cost of generation. While power generation has received a lot of focus from the political class, we believe a further increase in generating capacity will continue to be constrained by poor investment in transmission network and limitation of distribution networks.

Agricultural Sector

The Nigerian Agricultural sector is one of the biggest beneficiaries of the policy stance of the Buhari administration. This captures initiatives from both the Federal Government and the Central Bank of Nigeria. Notable policies targeted at the sector include; Commercial Agriculture Credit Scheme (CACS), Presidential Fertilizer Initiative (PFI), CBN’s Agribusiness Small & Medium Enterprises Investment Scheme (AGSMEIS), Anchor Borrowers Program (ABP), and the Real Sector Support Facility (RSSF) which targeted players in the Agricultural sector (among others) with an attractive single digit interest rate. Despite favourable policies, the farmer/herder crisis buffeted activities in the sector in 2018. Over the next four years, we see further support initiative targeted at driving output in the sector, as the sector remains one of the critical sectors for job creation within the policy framework of the administration.

Financial Markets and Funds Flow

For the financial market, although an opposition victory would have been greeted by a probable knee-jerk excitement, which would have buoyed sentiment in the interim, the re-election of President Buhari portends a stable outlook for the economy and the financial market over the next 3 years. As noted above, with GDP growth expected to remain positive momentum over the short to medium term alongside further moderation in inflation rate and interest rates, appetite for investment in Nigeria is anticipated to increase. As such, we foresee increased foreign capital inflow, with Portfolio Funds (FPIs) taking a major share relative to Foreign Direct Investments (FDIs). This will support FX liquidity, with the Investors and Exporters window expected to continue to play a key role in ensuring currency market stability. Nevertheless, the multiple exchange rate environment may limit the inflow of FDIs, amid other concerns on regulations, fiscal/debt sustainability, and challenges in the operating environment. Accordingly, we expect the yield on government instruments to moderate sharply in the short to medium term while sentiment for equities would improve as investors revert to fundamental drivers of stock market performance rather than political uncertainties.