INTRODUCTION
Former military head
of State Muhammadu Buhari has become the first Nigerian to defeat a sitting
president through the ballot box, putting him in charge of Africa's most
populous nation and its biggest economy. Buhari was declared the winner
after he gained 2.7 million more votes than his rival, incumbent President
Goodluck Jonathan. This was made possible after he managed to secure more than
25% of votes in 24 states, ruling out a run-off vote. To win the election,
Buhari had needed more than 50% of the total votes nationally - and take at
least 25% of the vote in two thirds of the states. Jonathan has publicly
conceded defeat and conveyed his "best wishes" to the president-elect.
He urged his supporters to follow "due process" in channelling their
frustrations at losing the election amid fear of violence. Victory for Buhari
marks the first time in Nigeria's history that an opposition party has
democratically taken control of the country from the ruling party.
The result of the
National Assembly election declared by the Independent National Electoral
Commission on has also pushed the opposition All Progressives Congress to the
majority status in the 109 membership Senate. Before the election, the Peoples
Democratic Party enjoyed the majority status in the red chamber with 64 members
while the APC has 41. Other parties, like the Labour Party, the Accord Party
and the Social Democratic Party, shared the remaining five seats. The APC will
now have 64 senators; the PDP, 45; and the Labour Party, one. The development
will obviously alter the configuration of the Senate leadership in the 8th
Senate which would be inaugurated in June this year, because the opposition APC
which is currently in the minority, would constitute the principal officers.
Given this, the President elect should have the full support of the upper house
which would be needed to carry through the much needed change the election was
all about. The Senate support would be critical in the approval process of his
chosen team, which would constitute his cabinet.
Cabinet Selection
Buhari’s
1984 cabinet was initially hailed as one that focused on technocrats, not
politicians. It was understandable at that time, considering just how
discredited Nigeria’s political class was after four years of a deeply
unsatisfying democracy. However, appointing Ministers in Nigeria’s democracy is
a task in which geography tends to trumps merit. Nigeria’s constitution
stipulates that “the President shall appoint at least one Minister from each
State, who shall be an indigene of such State.” PDP Governors have historically
played a significant role in nominating Ministers. In 2007 President Yar’Adua
reportedly asked state governors to nominate three names each, to constitute a
long-list from which he selected the final line-up. In states without a PDP
Governor, party leaders are typically expected to nominate. The President of
course would also have his own candidate(s), as would the Vice President, and
other party leaders.
With Buhari’s win, this will be the first time the
APC will have to pick a federal cabinet. What template will the APC likely
adopt?
APC
Governors will very likely play a key role in his government – as they have in
the campaign. Governors Amaechi, Kwakwanso, Fashola, and (immediate past
Governor of Ekiti) Fayemi are arguably the most influential today within the
party’s ranks, and will likely play key roles in a Buhari government. Other
power brokers include Bola Tinubu and Atiku Abubakar, influential members of
the APC, and considered as party leaders. They will be expected to nominate
Ministers to a Buhari government. Their influence can already be seen in the
campaign structure. Vice Presidential candidate Yemi Osinbajo is firmly in the
Tinubu political camp; he served as Tinubu’s Attorney General when the latter
was Governor of Lagos State between 1999 and 2007. Garba Shehu, head of the
campaign communications team, was drafted from the Atiku Media Office, which he
has headed for several years. He also served as spokesperson to Atiku when he
was Vice President.
Another
influential bloc will be Buhari’s long-time associates and supporters. Before
now they were organized chiefly as ‘The Buhari Organisation’ (TBO), a campaign
group founded in 2006, and which, in 2010, became the Congress for Progressive
Change (CPC), the political party that Buhari founded in 2010, and on whose
platform he contested for office in 2011. Key members of this bloc include Sule
Yahaya Hamma, who ran the Buhari campaign in 2007 and 2011; Buba Galadima,
National Secretary of the CPC, and also a member of the party’s board of
trustees, retired Colonel Hamid Ali, Buhari’s Chief of Staff. They are the ones
likely to form Buhari’s kitchen cabinet, and gatekeepers to his presidency.
The APC’s campaign
slogan emphasized the need for change from the direction the country was
headed. Whatever the composition of the cabinet, Buhari and his team would have
a daunting task ahead of them. The issues are tabulated in the table below:
|
The
Issues
|
Present
State
|
Buhari’s
Government
|
|
Security
|
Deplorable
|
Improvement
Expected
|
|
Corruption
|
Pervasive
|
Improvement
Expected
|
|
Institutions
✓
Judiciary
✓
EFCC
✓
ICPC
✓
Police
✓
Military
|
Weak
✓
Corrupt and slow
✓
Weak , Ineffective
✓
Weak Ineffective
✓
Corrupt, Incompetent
✓
Weakened military
|
Changes?
✓
Improved Judiciary
✓
Effective EFCC
✓
Effective ICPC
✓
Improved Police force
✓
Stronger military
|
|
Infrastructure
|
Deplorable
|
Improvement
Expected
|
|
Political
Institutions
|
Immature
|
Maturing
|
|
Resource Management
|
System is corrupt
and inefficient
|
More transparent
system
|
|
Economic Management
|
Lofty ideas, poor
implementation
|
Status Quo will
remain
|
|
External Reserves
|
Unhealthy Position
|
Improvement
Expected
|
|
Diversification of the
Economy
|
Poor despite the
transformation agenda
|
Tricky but likely
to made a headway
|
|
Exchange Rates
|
Weak
|
Improvement
Expected
|
|
Inflation
|
Stable
|
Higher
|
|
Interest Rates
|
High
|
Higher
|
|
*Unemployment
|
High
|
Moderated
|
|
National Debt
|
Reasonable level
|
Higher
|
|
International
Perception
|
Bad
|
Improvement
Expected
|
|
FDI
|
Fair
|
No change for now
|
|
Cost of
Governance
|
High
|
Higher
|
ECONOMIC
OUTLOOK FOR THE REST OF THE YEAR
Outlook
Drivers
Political
With the emergence of
a new President elect and the magnanimity exhibited by the incumbent in
conceding defeat, the political terrain has become clearer. The most critical
election – the Presidential election has come to pass and the outcome is widely
acceptable. Political tensions have been doused by the results and their
acceptance. In spite of this assertion, we still expect pockets of violence to
continue in some areas where some candidates have lost but not to the extent
that would lead to the balkanization of the country.
Crude Oil prices
Crude oil prices lost
over 50% in the last quarter of 2014 and traded close to $50pb at the end of
the year. Oil price recovered slightly in the first quarter of the year,
powering above $60pb before settling at $54pb.
Given that the Nigerian economy is heavily dependent on the movement in
oil prices and would need oil prices to remain at around $110pb before it can
balance its budget, this recovery is insignificant to make any meaningful
impact. With Buhari’s win, we expect a new budget based on a more realistic oil
prices for 2015.
Crude oil prices have
done close 1000% increase in the last 20 years when OPEC controlled over 60% of
the market. OPEC now controls about 30% of the market effectively reducing its
capacity to influence prices. More so, alternatives to oil are been discovered,
more oil producers are emerging and reserves are likely to run out in the next
20 years. Therefore oil prices will find
equilibrium at lower levels in 2015 and years to come.
Corruption
In the words of the
President elect “if Nigeria does not kill corruption, corruption would kill
Nigeria”. Transparency international defines corruption as “the abuse of
entrusted power for private gain”. In Nigeria, we have grand corruption which
can be defined as corruption occurring at the highest levels of government in a
way that requires significant subversion of the political, legal and economic
systems. Such corruption is commonly found in countries without adequate
policing of corruption. This issue of inadequate policing is what the President
elect has promised to address by strengthening the Economic and Financial
Crimes Commission (EFCC). We also envisage moves towards the establishment of
special courts to try corruption cases only. A credible system in place that
tackles corruption would improve the country’s perception and would also be a
plus for the country’s risk analysis.
Security Issues
This and the level of
corruption was the cornerstone of the campaign by the APC. The postponement of
the elections in the first place hinged on the deplorable state of security in
the North East. Over 10,000 deaths have been recorded since the insurgency
began 5 years ago. Within the six weeks postponement, most areas controlled by
the insurgents were liberated by the army. This, we expect to reduce the risk
posed to the National outlook which had already reached around 64% by the end
of 2014. We expect the new government to intensify the war on Boko Haram and
bring the insurgency to its barest minimum by the end of the year. This
however, is without prejudice to the group’s capacity to continue to use
suicide bombers to carry out terrorist activities in major urban cities in the
North.
2015 Budget Proposals
We also consider the
2015 budget proposals as a significant outlook driver for 2015. Since
government is the largest spender, it would be instructive to analyse its
capacity to meet set budgetary targets for 2015, given the impact of oil prices
on government revenue. The basis of the 2015 rested on a number of
assumptions:
•
Oil
production remains at 2.2782 million barrels per day -
•
Benchmark
oil price of $65/barrel
•
GDP
growth rate projected at 5.5%;
•
An
exchange rate of N165 to the US Dollar
The Oil price
assumption may not hold because year to date average oil Price if around $52
pb. Oil production has also hovered around 1.90 barrels per day. The naira has
already been devalued up to N199/$. We therefore expect a new budget or in the
very least massive adjustments to this budget as the new government take over.
Economic
Growth Outlook
The National Bureau
of Statistics (NBS) estimated real Gross Domestic Product (GDP) growth rate at
5.94% in Q4 of 2014 lower than the 6.77% recorded in the corresponding period
of 2013. The slowdown in growth resulted mainly from the non-oil sector, which
grew by 6.44% in Q4, 2014 compared with 8.78% Q3 2014. Agriculture, industry,
construction, trade and services contributed, 0.89, 1.30, 3.64, 0.87 and 2.45%
compared with 1.21, 1.04, 0.36, 1.08 and 2.53% respectively, in Q3 2014. The
softening non-oil GDP was partly traced to the spillover effects of low oil
prices which negatively impacted agricultural output, trade and services.
Oil-GDP on the other hand, grew by 1.18% in Q4, 2014 compared with a decline of
3.60% in the preceding quarter. The growth in oil-GDP is particularly
noteworthy because it came at a time when the sector was experiencing external
negative price shocks. We still maintain our growth forecast of 5.65% for 2015.
Outlook
on Inflation
In 2015, consumer
price inflation will be influenced by a number of factors that are
cost-related. With a new government coming in May, we expect increase in
spending in some key areas relating to infrastructure. Given the present income
profile of the country, we do expect higher borrowing to fund the expected
deficit that may come from this spending.
Dividend of the war on corruption is not expected to trickle- in the
near term. Factors that may fuel inflation would be:
•
Depreciating
value of the naira and pass through effect on consumer goods
•
Higher
tariffs on imports on goods available in Nigeria
Apart from the cost
push factors above, demand pull elements that may influence prices in 2015
would include the following:
•
Increasing
fiscal deficit due anticipated increase in government spending
•
Fiscal
overdrive from political spending as new governors would be sworn in
Given these factors,
we project higher year on year inflation rate of 13% to 15% for 2015 up from
8.4% in February 2015.
Outlook
on Interest Rates
Traditionally the
level of interest rates in Nigeria has been influenced by a combination of the
following factors:
•
Money
supply (M2) which stood above N16 trillion in December declined by 1.42% by
February 2015
•
Price
level at 8.4% in February
•
Pressure
on exchange rates (N200/$1 - interbank)
•
The
level of government borrowing
Given lower oil
prices projected for 2015, and higher recurrent expenditure budget, we expect
further tightening by the CBN during the year particularly to protect the
Naira. In its march MPC, the CBN left unchanged its Monetary Policy Rate.
Consequently we anticipate that the CBN would gradually move the MPR by at
least 100 basis points almost every quarter from its present 13% to 16% by the
end of the year. With the MPR hovering between 13 and 15% one would expect
overall interest rates to be much higher. Prime lending rates for most banks
would test 28% p.a by the end of the year, while the risk free rate in the
economy would stay close to around 16.5% p.a.
Outlook
on Exchange Rates
Following the
depreciation of the Naira in the later part of 2014 further depreciation is
expected in 2015 before the currency can attain its equilibrium level. The
Naira exchange rate would be influenced by the following factors.
•
The
price of crude oil – (exogenous, cannot be influenced by the government)
•
The
level of external reserves – (depends on export revenue and accretion to the
reserves. The amount save is within the control of the government)
•
inflow?/Outflow
of FDI (depends on perception and country risk analysis – this is expected
improve under the new dispensation)
•
Quantum
of capital flight (will reduce with the lowering of political tensions)
•
Level
of corruption (the new government has made the fight against corruption one of
its cornerstones)
•
CBN’s
monetary and exchange policy (CBN independence is guaranteed by the
constitution)
The most important
fundamentals are the price of oil and the level of external reserves. Both have
weakened significantly since the fourth quarter of 2014. However, conscious
efforts to beef up the external reserve (which is now below $30 billion) are
within the purview of the government. Given the above comments, we anticipate a
slowdown in the fall of the value of the Naira with a slight appreciation in
value by the third quarter. We expect the effective rate of the Naira against
the dollar to average N190-215/$ in by the end of the year.
Stock
Market Outlook
The performance of
the Nigerian stock market would be influenced by a number of factors which
would include the followings:
•
The
country risk analysis
•
The
activities of Regulators and the appointment of a new DG of SEC
•
Poor
corporate results expected given the tough operational environment
•
Tight monetary policy implemented by the CBN and
rise in interest rates will induce exit of funds from equities
•
Depreciating
exchange rates and its effects on portfolio investors
Given the above
factors we therefore present three scenarios on the stock market outlook for
2015.
Post March Elections
•
Emergence
of a new President would give people a sense of the need to move on
•
Market
has already reacted positively to the declaration of Buhari as the winner of
the 2015 Presidential elections.
•
We
expect this trend to continue for the rest of the year
Post Swearing in
after May
•
Market
is expected return to normal as country risks would have diminished
•
This
would pave way for the return of foreign portfolio investors
We assume a positive
bias in the fourth quarter against the backdrop of attractive prices of blue-chips
and large cap stocks particularly those in the building materials and breweries
sectors. We also assume an average oil price of around $57 per barrel.
Likewise, we assume the CBN will relax the monetary policies to spur lending in
the banking space as banking equities account for over 50 % o f market
liquidity.
Fixed
Income Market Outlook
The fixed income
market is set thrive for the rest of the year with a new government in place.
We look forward to the prospect of accelerated improvement in physical
infrastructure such as roads, rail and water transportation. We also see the
provision of housing as an important step. While modern governments tend to
achieve this through the Public Private Partnership (PPP) arrangements we
expect the government to jumpstart this process which would involve heavy
capital outlay. Such would lead to increase in government borrowing and hence
higher interest rates in the economy.
The other market
drivers for 2015 are as follows:
•
Low
level of returns in the equities market will prompt flight to safety and
guaranteed returns in the fixed income market
•
The
level of government fiscal deficit – already highlighted
•
The
price of crude oil and its affects government export revenue
•
Introduction
of FMDQ and its marketing activities to create more awareness
•
Decisions
of the Monetary Policy Committee (MPC) of the CBN as it affects the direction
of Monetary Policy Rate (MPR)
•
The
general level of liquidity as dictated by M2 -
the wider definition of money
Taking the direction
of these drivers into consideration, our outlook for each segment favoured by
institutional investors is as follows:
FGN Bonds
Increasing volumes
predicted in the primary market as the FGN sought to finance its fiscal deficit
in the face of dwindling oil revenues. Activities in the secondary market will
also increase as bond yields will be above the MPR. Bond yields would likely
range between 16 and 18%.
Sub National
Bonds
Fewer may be issued
in 2015 as the states would find it increasingly difficult to finance existing
bonds due to an expected fall in statutory allocations in 2015. Also some
states may not meet the new stringent measures put in place by SEC and if
issued, coupon rates would have to be very high to attract investors. Secondary
market for such bonds will remain an illusion in 2015.
Corporate Bonds
The prospect of
issuing at high coupon rate would prevent corporate bond issuance in 2015. Lack
of liquidity for such bonds would mean a non-existent secondary market in 2015.
Treasury Bills
Increasing awareness
of instruments in the fixed income market may favour T-bills in 2015 due to its
liquidity, safety, ease of trading and encouragement of individual investors
with relatively small amount of money. We look at t-bills rate yield in excess
of 18% in 2015.
