Nigerian financial markets roared on the result and conduct of the recent elections. The stock market started to recover in the days before the presidential polls on March 28, and the NSEASI surged by almost 17 percent in the following week.
Yields on fixed-income instruments narrowed by up to 150bps. Further, the currency recovered sharply on the interbank market, adding credibility to the CBN intervention selling rate of N197 per US dollar. We would expect underlying sentiment to remain good in the weeks ahead.
A turning point could be the formal handover to the new administration, now scheduled for May 28, after which Muhammadu Buhari will be under pressure to meet some high expectations for change. We hear the objection that the scope for change is limited without a recovery in the oil price because of the failure of the outgoing administration to prepare for the rainy day with the building of solid fiscal buffers. We would say that the sweeping victory of Buhari and the APC, along with the incumbent’s rapid acceptance of defeat, have created their own momentum.
This first for Nigeria (the defeat of the ruling party) echoed that in Zambia in 1991 when the Movement for Multiparty Democracy, led by a charismatic trades union leader (the late Frederick Chiluba), defeated the United National Independence Party of the nation’s first president, Kenneth Kaunda.
The comparable breakthrough in Kenya in 2002 was less dramatic. Again, the ruling party (Kenya African National Union) was heavily beaten at the polls but by a côterie of its former leading lights around the new president, Mwai Kibaki.
Beyond Africa, we can point to recent examples of high expectations following the election of two presidents with an agenda for change and with a track record to match: Joko Widodo, the mayor of Jakarta, in Indonesia in November 2014 and Narendra Modi, the chief minister of the state of Gujarat, in India in May/June 2014. The parallels may flatter Buhari, whose track record was established as a military head of state, albeit one with a strong stance on governance. They do show limits to the honeymoon period for the new presidents of between six months and one year. This helps to explain suggestions from the APC camp that the electorate will not see substantial change before October because of budget restrictions.
Buhari and the APC do enjoy copious international goodwill because world leaders are always in need of good news and because Nigeria has a central role in Africa. Some of the goodwill could filter down to multilateral agencies over time.
The new administration will also enjoy a majority in both houses of the National Assembly and allies among close to two-thirds of the state governors. If it persuades its elected representatives to place their party political above their institutional loyalties, unlike the outgoing government, then we will see a welcome pick-up in the assembly’s productivity as measured by the passage of legislation. There have already been signs that the assembly has embraced the new macro realities, notably its approval of 2015 budget proposals based on an oil price assumption of US$53/b.
Relations with the states present a different challenge. The government of Lagos State will feel that the FGN will be at least even-handed in matters fiscal. More broadly, the APC knows that state government finances in aggregate have taken a huge hit from the halving of the oil price and that salary arrears have mounted. We doubt that it favours a change in the revenue sharing formula to their benefit. Yet it will have to give some ground fiscally to the state governments for the sake of a better working relationship with them and to overcome specific logjams (like the migration from the excess crude account to the sovereign wealth fund). In its policies for agriculture, for example, we would expect greater collaboration between the new federal and state governments.
Although Buhari is characterised as a “man of few words” and although the handover is several weeks away, some broad policy lines are emerging. The president-elect is said to have been a statist: even if this is still the case, he heads a coalition of parties, without which he would not have won at the polls. Compromise necessarily beckons.
We anticipate an increase in regulation to boost revenues (such as in the oil industry), improve the quality of the product (security industry) and perhaps oversee segments of the economy in which a few companies are making particularly large profits. Fiscally the priority, as with the outgoing administration, has to be to increase non-oil revenues. This effort will likely be concentrated on strengthening collection and removing exemptions rather than levying a raft of new federal taxes. On the monetary side we have heard hints that the naira should “find its level”.
Both the CBN and the monetary policy committee would have to be convinced of the argument for such a break with the past. Both enjoy autonomy although they would be persuaded if the decline in official reserves reached the point of no return.
We will not play the party game of spot-the-new-finance-minister but we will say that he/she will have a full in-tray on assuming the post. The elections have given a huge boost to confidence domestically and internationally. The new administration will have to manage popular expectations and maintain the momentum with positive steps. Married couples will testify that the honeymoon period is finite.
Gregory Kronsten
