Tharcherist Revival Or Stagist Clean-up For Nigeria?

LAGOS (Capital Markets in Africa) –  Nigerians will choose a new leader in elections on Feb. 16. The economic policy divide between the candidates is the widest in the country’s 59-year history. Opposition candidate Atiku Abubakar pledges a Thatcherist liberalization of the economy, which he says will ‘make Nigeria work again’ after the 2016 recession. Incumbent Muhammadu Buhari is sticking to his policy of state interventionism. He wants to reduce Nigeria’s dependency on oil exports, promote domestic agriculture and manufacturing and stamp out graft.

The election outcome has implications for Africa’s largest economy well beyond the four-year term of the winning candidate. Scroll below for Bloomberg Economics’ analysis of the likely consequences of two radical policies on offer — floating the naira and liberalizing the energy sector as proposed by Abubakar.

Floating Nigeria Naira Unlikely to Trigger ‘Massive Devaluation’
Nigeria’s opposition presidential candidate Atiku Abubakar has pledged to free the naira from its peg to the U.S. dollar and abolish restriction on access to foreign currency introduced by the current administration. A free float is unlikely to spark a ‘massive devaluation’ as warned by Central Bank of Nigeria Governor Godwin Emefiele. The black-market and official exchange rates have converged from the sharp gap in 2015-17 that discouraged foreign investment and pushed up costs of imports not authorized for access to foreign currency. The naira does not appear to be overvalued from a real-effective exchange rate perspective after the recent devaluations, but an expected reform could still spark speculation as experienced in Morocco in 2017.

Shift in Nigeria’s Financial Inflows Could Make Naira Volatile
Shifts in Nigeria’s balance of payments is likely to make a free-floating naira more volatile today than if it had been liberalized a decade ago. Firstly, Nigeria no longer runs a consistent trade surplus. A growing population has pushed up imports while oil exports have stagnated, especially after the latest drop in the price of crude. The Excess Crude Account of rainy-day funds built up in 2005-2010 has been exhausted.

Secondly, foreign direct investment has more than halved since 2010. Financial inflows are now dominated by more volatile portfolio investment which would likely be quick to leave if foreign investors’ perceptions of risk-adjusted returns changed. As a consequence, higher interest rates may be needed to prevent the naira from depreciating.  

Energy Policy
Abubakar Pledge to End Nigeria Fuel Subsidies To Bring Few Gains
Nigeria’s opposition presidential candidate Atiku Abubakar’s plan to remove price caps on fuel is likely to bring limited gains — the cost of fuel subsides has already been cut to zero from almost 5% of GDP in 2011. Subsidy cuts are unpopular with consumers distrustful that they would benefit from any redirection in spending. Fuel subsidies have been less costly in Nigeria compared with other large petrostates. That’s because oil output, car ownership and power consumption are lower on a per capita basis. Fuel subsidies mainly benefit  richer consumers — they are more likely to drive cars and run electricity generators than poorer people.

In Nigeria’s case, widespread graft can be added to the negative externalities.

Refining 50% of Oil Output Could Add 2.5% to Nigerian GDP
Another pillar of opposition candidate Atiku Abubakar’s energy policy is a pledge to privatize all four refineries and ensure that the country refines at least half of its oil output, currently about two million barrels a day. If successful, we estimate this would add about 2-2.5% to Nigeria’s 2018 real GDP, based on official GDP figures for oil refining and estimates of current refinery output.

Raising utilization rates at the four state-owned refineries targeted for privatization would be challenging. A more modest increase to about a third, which seems more likely, would add about 1.5 ppt to GDP. The gains would mainly come from the expected opening of the Dangote Refinery in 2020, with a capacity of processing 650,000 barrels per day.

Economic Growth
Nigeria Growth Picks Up But Poor Economy Still Favoring Abubakar
A recent pick-up in growth may help incumbent President Muhammadu Buhari by raising hopes of a more forceful economic recovery following the 2016 economic recession. The economy recorded its strongest quarterly growth in 4-1/2 years in 4Q even as oil output declined. Real GDP for 4Q showed growth of 1.1% quarter-over-quarter, according to our seasonal adjustment of the data released by the National Bureau of Statistics. That’s the strongest reading since 2Q14, just before oil prices dipped. The strong contribution came from the service sector, with telecoms being the standout performer.

Still, the weakest four-year economic performance in nearly three decades should benefit challenger Atiku Abubakar.

Nigerian Growth to Accelerate in 2019 on Services and Oil Output
The Nigerian economy expanded by 1.9% in 2018, an improvement from 0.8% in 2017 and a 1.6% contraction in 2016. Still, the recent figures are a far cry from average growth of 7.7% registered in 2000-2014. We expect growth of 2.5% in 2019, primarily driven by private consumption. The services sector accounted for half of growth in 2018, but the 1.8% expansion was still weak compared with the 5.8% average in 2011-14.

We expect the oil industry to make a larger contribution in 2019, thanks to the Egina offshore field which has just come into production. A victory for opposition candidate Atiku Abubakar in Saturday’s presidential elections would likely boost capital investment, although doubts loom about how much of his reform agenda, he would be able to implement. 

Source: Bloomberg Business News