Nigeria in 2011

It does not require any genius to declare that politics will define Nigeria this year. The intelligent analyst and investor will divide 2011 into two and assume that H1 will be dominated by party nominations, campaigns and elections….and then the aftermath! In short politics will determine the first half of the year; and the outcome of that politics will shape the second half. But there will be other underlying drivers. Globally the pace and sustenance of global recovery; global financial stability; global oil demand and oil (and other commodity) prices; and in West Africa, the crisis in Cote D’Ivoire will also shape developments in Nigeria. The worst of global recession appears over but risks remain, with sovereign debt and its link with financial sector stability. Oil demand appears strong enough to push prices up, but the question is up to what point? And for how long?

Cote D’Ivoire can evolve in many ways-civil war; partition into North or South; military intervention led by ECOWAS but with US, UN and EU support; or most likely Gbagbo is squeezed out through sanctions and adverse economics. Many of these scenarios will affect the region, especially Ghana and Nigeria. Domestically fiscal behaviour is the major concern-will we continue to spend recklessly and continue reserves depletion , or will we adopt more conservative oil price benchmarks and enact a sovereign wealth fund that allows us save for stabilisation, future generations and infrastructure as proposed in the draft bill. If we don’t reverse the rate of foreign reserves depletion and actually begin to build up again, there will be a high price to pay, sooner or later!

The financial sector will also be critical. Last year, the CBN admits credit to the private sector shrank by 4.92%, effectively crowded out by credit to federal, state and local governments which grew by 68% and 19% respectively. In 2011, financial sector conditions will be important. Last year the CBN succeeded in birthing AMCON which promised to help reflate the financial sector and revive the flow of credit to the private sector. The CBN and its Monetary Policy Committee may have snuffed out such hopes! Its concerns about inflation were however legitimate as far as raising the MPR from 6.25% to 6.5%; but I question the wisdom of raising the banks’ liquidity ratio to 30%, and cash reserve requirement to 2%, just so soon, especially before any discernible rise in private sector lending. The lending crunch may yet continue!!!

It will be critical that President Jonathan secures at least two achievements in the energy sector-passage of the Petroleum Industry Bill before the elections and privatisation of the PHCN unbundled entities. It is very possible, with political will, for the president to coax the National Assembly into passing the petroleum bill, but essentially the power privatisation is out of his hands-will rational investors, especially foreign ones put their money in Nigeria just before elections? I expect GDP to grow around 6.5%, with a little political risk discount, but as we have previously pointed out, that will have little or no effect on unemployment, poverty and purchasing power, until we diversify the economy, fix power so that manufacturing and services can grow and improve policy and execution in transportation, solid minerals and agriculture.

In Q4 2010, the NBS data reveals that crude petroleum and gas (15.7%), wholesale and retail trade (16.19%) and agriculture (42.32%) together contribute 74% of our GDP! If we don’t increase, value-adding activities into our national output, then poverty and under-development will continue to prevail, in spite of the macroeconomic picture, which may appear positive. Exchange rates may come under threat in the second half of the year, as government becomes free to act having (hopefully) put elections behind it! Downstream oil sector deregulation may also be a post-election reality. The implication as the CBN fears may be that efforts to achieve single digit inflation may flail in 2011. The telecommunications sector remained by far the fastest growing sector in Nigeria, with hotels and restaurants, building and construction, solid minerals and wholesale and retail trade following behind. Some of these sectors will experience lower growth in 2011.

So back to politics, which will define everything else, both before and after elections. We now know who the major contenders are-President Goodluck Jonathan, of the PDP who is fresh, enjoys incumbency powers and adopts a conciliatory approach that allows him win over adversaries; ex-military ruler, General Mohammadu Buhari of the CPC who is popular in the Hausa-Fulani, Islamic North, and is seeking support down South; outgoing Kano governor, Ibrahim Shekarau who has a populous home base and a slightly resurgent ANPP; and Mallam Nuhu Ribadu of the ACN. Though there are scenarios that could conceivably produce a victory for any of these four, the more likely scenario remains a Jonathan victory. Opposition alliances, even if forged in desperation may be fractious and lack internal coherence; and Jonathan’s style may yet see him rally critical stakeholders like former President Ibrahim Babangida, General Aliyu Gusau, Dr Bukola Saraki and former Vice-President Abubakar Atiku, and indeed important Northern constituencies behind him.

Yet crisis scenarios are not impossible! The elections may be fought on the basis of ethnicity, religion and region. And the closer the results, the higher the potential for instability. The best-case scenario as in the PDP conventions will be a clear margin for whoever is the victor!