Nigeria: 2015 Election analysis

At the time of writing, the election results had still not officially been declared by the Independent National Electoral Commission (INEC). Problems with biometric card readers delayed voter accreditation, and a few attacks on election centres caused a delay in the voting process itself. This led INEC to extend the vote by one day from March 28 to March 29 in some areas.

We do not expect to see significant changes in policy regardless of who wins. The incoming administration will first and foremost have to focus policy efforts on dealing with the oil price shock and its economic consequences. Much more important than the actual winner is that the stated result holds without significant social unrest. The situation remains highly uncertain. We remain neutral external debt but expect further Naira depreciation, forecasting NGN/USD to average 215 this year.

Elections “largely peaceful” but risks still high
Nigeria’s ethnic and religious divisions mean that the elections are always a volatile time. Leading up to the event many politicians and civil society leaders warned people to remain calm and not instigate violence. On Saturday, the United Nations stated that the elections were “largely peaceful”. However, attacks have been carried out, most likely by Islamic militant group Boko Haram, in an attempt to prevent people from voting. There are reports that at least 43 people have been killed.

However, the real risk of social unrest comes after the votes have been counted. In 2011, over 800 were killed in post-election violence. A win by the incumbent People’s Democratic Party (PDP) led by President Jonathan could cause significant post-election violence in the North of Nigeria, if supporters of Buhari, the leader of the opposing All Progressives Congress (APC), refuse to accept the vote, suspicious of electoral rigging. However, an APC win could cause shockwaves elsewhere, most likely in the oil producing Niger Delta region where Jonathan has historically had a base of support.

Six week delay favoured PDP but result too close to call
The six week delay in the elections did work in favour of the incumbent PDP party. There was a large increase in their campaign spending and the President himself was able to spend more time gathering support in key regions. In addition, with the help of troops from Niger and Chad, the Nigerian Army was able to recapture a large amount of territory in the North from Boko Haram. Given that the PDP’s previous inability to stop the spread of terrorism in the region was a key weakness, these developments have undoubtedly helped to boost their chances of winning but at this point the election result is still too close to call.

Run-off election would take time, may worry markets
To win the election, the presidential candidate must win at least 50% of the total vote and at least 25% of the vote in 24 of Nigeria’s 36 states. If this does not happen, then a runoff election must take place within a weeks’ time. The Presidential election in Nigeria has never before been close enough to warrant a run-off and INEC have found themselves ill prepared.

The law says a runoff vote must take place 7 days after the first election, but due to logistical challenges we doubt that this will be possible. The National Assembly has passed an amendment act to extend the time period allowed to 3 weeks.

The main concern is that an interim government may be installed in the meantime, particularly if there is enough civil unrest following the result to warrant military intervention. The most pressing fear is that if an interim government is installed, it could refuse to relinquish power, perhaps ending the democratic process in Nigeria altogether.  This is not our base case scenario, but the high level of uncertainty on the eventual fall out from this election will certainly weigh on Nigerian assets in the short term.  

Further Naira weakness likely
The risks of electoral violence will increase pressure on the currency. Due to the new system of Naira trading, this may not immediately be reflected in spot Naira rates, but will most certainly be seen domestically. Black market rates of over 220 NGN/USD compared to spot of less than 200 suggest that there is excess dollar demand in the system. There is a small chance this could abate slightly post elections, but our base case is that another currency devaluation is needed. We expect this to be accompanied by 200bp of rate hikes to curb inflationary pressures. We expect an average NGN/USD rate of 215 and inflation of 12.4% in 2015.

Currency devaluation may also mean that some of the controls on the use and trading of FX in Nigeria could be loosened. This would help to bring back some liquidity to currency and local markets and lessen the threat of index exclusion for Nigeria’s bonds. We estimate around $15bn of foreign money is left in Nigeria’s local markets following outflows in the past 6 months. Therefore we believe the CBN could see devaluation as a worthwhile price to pay to avoid further exit of foreign capital that could result from index exclusion. It would also help to stop the rapid pace of reserve decline.

Remaining neutral Nigeria EXD
Spreads on Nigeria’s external debt have tightened significantly over the last month. These political risks may cause spreads to widen again, however Nigeria’s ability to meet external debt obligations of just 2% of GDP is still high and hence we retain our neutral recommendation.

Source: Bank of America Merrill Lynch Research