Index Trend Previous Quarterly Editions
Expropriation Risk: 55 Political Violence Risk: 66 Terrorism Risk: 78 Exchange Transfer and Trade Sanction Risk: 58 Sovereign Default Risk: 50 48
Risk Temperature 64 (Medium-High) -1
TREND ▼ ▲
In the final weeks before February’s presidential and legislative elections, President Muhammadu Buhari, 75, found himself in a tougher than expected race against Atiku Abubakar, 71, of the People’s Democratic Party (PDP). Buhari, who leads the governing All Progressive Congress (APC) party, ran a lacklustre campaign that never seemed to maximise the advantages of incumbency. Having asked at the outset for his presidency to be judged on how far he has been able to eliminate corruption, reboot the economy, and re-establish security, Buhari has delivered what can at best be described as a mixed performance. Despite claims to have recovered more than 2.75 billion dollars in stolen assets, his record on corruption is relatively modest. However, this proved sufficient in electoral terms, and official figures gave Buhari 15.2 million votes to Abubakar’s 11.3 million. Although the PDP has promised to challenge the result in court, no change to the outcome is expected. The economic recession in 2016 was the first in a generation, and recovery has been slow under Buhari. Growth is not expected to be much above 2% for the current year, which is barely enough to compensate for the rise in population. More positively, Buhari has made significant progress against the Islamist extremist group Boko Haram. Although his earlier claims that the group had been militarily defeated proved premature, it no longer controls the large parts of Nigeria’s northeast that it held only a few years ago. However, the army seems unable to prevent continuing attacks on military and civilian targets. Inflation rose to 11.3% year-on-year in November largely due to a surge in food-price inflation for staples such as bread and cereals. Inflation is expected to continue rising during the first half of 2019 as a result of the government’s pre-election spending and may not fall below 9%, which is the top end of the central bank’s target band, before the end of the year. While rising oil prices will increase government revenues, falling output is reducing the positive impact while higher prices means higher fuel subsidy payments. There is growing pressure to start scaling back the fuel subsidy regime, but the winner of the election will have little appetite for taking such an unpopular step so soon after what is likely to be a narrow victory. The draft budget for 2019 presented by Buhari uses a benchmark oil price of 60 dollars a barrel and a production target of 2.3 million barrels a day. Both figures look optimistic, particularly in light of OPEC's request at its December meeting that Nigeria observe a production quota of 1.68 million barrels a day. The government has still not found a way to boost badly needed exploration and development in the oil sector to compensate for dwindling reserves.
Expropriation Risk 55 (Significant) TREND ► ►
The prospect of another term for Buhari is not an encouraging one for investors, but his administration’s emphasis on the need to attract foreign investment is likely to continue after the election regardless of the result. Relations between Nigeria and South Africa, the continent’s two biggest economies, fell to an all-time low in November after the Nigerian government accused South African telecoms provider MTN of illegally repatriating 8.1 billion dollars and demanded two billion dollars in back taxes. It had earlier said that MTN has failed to meet the deadline for phasing out non-registered SIM cards, which the government says were being exploited by criminals and terrorists. The accusations of illegal repatriation have not been substantiated, however, and some investors are concerned that they are primarily driven by local resentment at MTN’s commercial success.
The groups calling for the secession of Biafra are attracting more attention, while Niger Delta militants are threatening renewed large-scale attacks on oil pipeline infrastructure
Political Violence Risk 66 (Medium-High) TREND ▲ ▲
As expected, the PDP alleged electoral malpractice after Buhari’s victory, but significant levels of post-election violence are not expected. However, Nigeria is struggling with a deteriorating security situation across the country. More than 27,000 people have been killed during in the decade-long Islamist insurgency in the north, while more than two million have been internally displaced. Thousands more are affected by conflict between herdsmen with nomadic flocks and farmers who are now cultivating what used to be grazing grounds. The groups calling for the secession of Biafra are attracting more attention, while Niger Delta militants are threatening renewed large-scale attacks on oil pipeline infrastructure. Nigeria’s armed forces are now too thinly stretched to tackle these multiple challenges.
Terrorism Risk 78 (Very High) TREND ▼ ▲
After losing much of the Nigerian territory that it effectively held in recent years, Boko Haram appears to have split in two, with a more radical Islamic State of West Africa Province (ISWAP) emerging with the aim of staging the kinds of high-profile killings seen in Syria and Iraq. The group claimed responsibility for a raid in November against an army base on the border with Niger and Chad that left an estimated 100 soldiers dead and another 150 wounded. Military morale is low, and questions are increasingly being asked about what has happened to the billions of dollars earmarked for armour and equipment.
Exchange Transfer and Trade Sanctions Risk 58 (Significant) TREND ► ▲
Nigeria’s exchange rate is not expected to see a significant move towards full liberalisation regardless of the election result. With inflation likely to remain above the central bank’s target for most of 2019, there is little prospect of an early fall in interest rates from the record level of 14% seen during the last two years. The central bank has been urging the government to save more of its oil revenue but, with the elections approaching, President Buhari has instead been dividing the windfall among the country’s 36 states where it is being used for recurrent expenditure rather than fostering the non-oil economy.
Sovereign Default Risk 48 (Medium) TREND ▼ ►
Despite the recent low levels of global oil prices, Nigeria’s foreign exchange reserves remain strong at some 48 billion dollars, and the debt-to-GDP ratio, while now above 20%, is relatively low. As a result, default is not a major concern. The government used revenue from Eurobond bond sales in 2017 and early 2018 to fund the budget and looks likely to do the same with the 2.86 billion dollars raised by a further Eurobond sale in January 2019. These sales indicate the readiness of the market to take on Nigerian debt.
