This content is from: Portfolio

Nigeria’s Peaceful Transition Boosts Markets and Growth Hopes

President-elect Buhari needs to tackle corruption, pursue energy reform and face down Islamic insurgency.

With the economy reeling from low oil prices and corruption running rampant, Nigerians looked to their new leader, Muhammadu Buhari, to restore order and prosperity. “Nigerians applaud as Buhari fills cabinet with nonpoliticians,” read the headline in the Christian Science Monitor, reflecting the widespread hopes for better days in the country.

That was on January 23, 1984, barely three weeks after Buhari had seized power in a military coup. The hopes didn’t last long. Buhari was deposed in another coup the following year.

Thirty years later Africa’s most populous country and largest economy is still too dependent on oil — it generates 70 percent of government revenues — and has suffered from the plunge in crude prices over the past nine months, while corruption remains as endemic as ever. The Nigerian people, however, are once again placing their hopes on Buhari. His resounding victory over President Goodluck Jonathan in the March 28 election, with 52.4 percent of the vote compared with Jonathan’s 43.7 percent, represented a landmark in Nigeria’s democratic development. It marked the first time an incumbent president had lost an election, and initial signs point to a smooth transition; Jonathan conceded before all the votes were in, and street violence was contained, a stark contrast to the riots that erupted in 2011.

The outcome should bolster long-term prospects for investment and growth. Much will depend on Buhari’s policies and team, though, which he needs to assemble before his May 29 inauguration. This time around, he can’t just pick a group of technocrats. Nigeria’s constitution mandates that ministers come from all of its 36 states, and the politicians who helped Buhari win will expect to be rewarded.

Some of the names attracting the most speculation are state governors facing term limits. Rotimi Amaechi, the outgoing governor of Rivers state, led six other governors in defecting from the ruling People’s Democratic Party to the opposition All Progressives Congress in 2013. Their switch of allegiance gave the APC the heft it needed to challenge for the presidency; only later did it settle on Buhari as its candidate.

Rivers is an oil-producing state and home to some of the Niger Delta region’s militant groups. Local media speculation has suggested that Amaechi could be named to head the Energy or Defense ministry. Other major cabinet posts could go to Babatunde Fashola, who has won credit as governor of Lagos state for improving municipal services in the country’s biggest city, and Kayode Fayemi, the former governor of the southwestern state of Ekiti.

Speculation about the key Minister of Finance post centers on Obiageli Ezekwesili. She would have big shoes to fill. The incumbent, Ngozi Okonjo-Iweala, enjoys strong credibility with foreign governments and investors, although she has lost popularity at home because of her association with Jonathan. Ezekwesili boasts a similarly impressive résumé and carries the credentials to help Buhari fulfill his pledge of cutting down on corruption. She served as minister of Education and of Solid Minerals under former president Olusegun Obasanjo in the 2000s and ran a budget-monitoring agency that worked to clean up public procurement processes. Like Okonjo-Iweala, she also did a stint at the World Bank, serving as vice president for Africa from 2007 to 2012.

Speculation about potential cabinet appointees may be less important than the sheer success of the election process itself. “It’s not as much about the names in Nigeria now, because democracy has won,” says Marcel Mballa-Ekobena, the head of investment products for Standard Bank Group, Africa’s largest lender.

That helps explain why Nigerian stocks rallied for a tenth day on April 2, bringing the cumulative rally in that period to more than 22 percent, while bonds yields dropped to four-month lows. The currency has not rallied, however. The naira has traded narrowly around 199 to the dollar. The Central Bank of Nigeria has spent $4.69 billion of reserves to defend the naira this year, but even so, it has declined just over 9 percent since the start of the year. The naira is still headed for a drop, according to analysts at Bank of America Merrill Lynch, because there is a gap between the official and black-market rates. They predict the currency will average 215 to the dollar this year, which is closer to the black-market rate reported in newspapers. With a strong U.S. dollar, a recovery is too much to expect. “Stability is the new recovery,” says Mballa-Ekobena.

Once Buhari assembles his team, one of his biggest challenges will be addressing several major issues in the energy sector. The president-elect is expected to disclose the details of an audit of the state oil company, Nigerian National Petroleum Corp. (NNPC), portfolio manager Joseph Rohm of Investec Asset Management wrote in an April 1 research note. Former central bank governor Lamido Sanusi was forced to stand down last year by President Jonathan after Sanusi alleged that the company had siphoned off some $20 billion of oil revenues; Jonathan later order the audit.

Oil producers have held off on major new investment in offshore production because the government’s failure to adopt a comprehensive overhaul of energy laws. The pending Petroleum Industry Bill would increase the government’s take of offshore production and spun-off parts of NNPC, which currently acts as both an operator and a regulator. “That could make it easier for NNPC to tap global capital markets,” says David Livingston, an associate in the Carnegie Endowment for International Peace’s Energy and Climate Program. Livingston also says Buhari’s team could choose to act on an existing plan to stop flaring natural gas and use it for power and industry instead.

Buhari has pledged to continue with the government’s current power sector reform agenda, which includes privatizing state assets and opening up the sector for investment. He also promised during the campaign to put more emphasis on renewable energy. Power is the top issue Nigerians want solved in the next six months, with 68 percent naming it as their primary concern, according to NOI Polls, an Abuja-based research company. The country generated just 135 kilowatt hours per person of electricity in 2011, just 1 percent of U.S. levels. The government aims to increase generating capacity tenfold by 2020.

Security was second on the list, at 58 percent. Although Buhari is expected to leave economic policy to his ministers, he could take a hands-on approach to the fight against Boko Haram, the militant Islamist group that has staged numerous attacks in the country’s northeast.

Thus far the formerly violent Niger Delta region, where militants once attacked oil infrastructure and kidnapped anyone who could return a healthy ransom, has remained peaceful. Jonathan comes from this region, and locals want more control over their lands and more of the profits from oil. In the past a northern Muslim like Buhari taking office could have been expected to trigger violence. This time one of the main militant groups, the Movement for the Emancipation of the Niger Delta, has pledged to support Buhari. That provides another reason to feel better about the future in Africa’s largest country.

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