Investors don’t like political uncertainty. So when the Nigerian government on February 7 announced a six-week delay in the country’s general election just one week before it was due to take place, investors voted with their feet, sending prices of stocks, bonds and the naira tumbling.
The last-minute postponement has raised fresh concerns about political stability in Africa’s largest economy and underscored the high stakes involved when voters finally do go to the polls, on March 28. Six months ago most investors were betting that President Goodluck Jonathan would win reelection comfortably, but allegations of corruption and the government’s apparent inability to contain the bloody Islamist insurgency of Boko Haram have tightened the race. The stated reason for the delay was to allow the military to subdue Boko Haram, but many observers believe Jonathan ordered the delay to blunt the rise of his rival, Muhammadu Buhari. His All Progressives Congress was formed in 2013 by a merger of small parties opposed to the rule of Jonathan and his Peoples Democratic Party.
Most observers are calling the race a dead heat, making this the first election in the country’s history where both leading candidates have a real chance of winning. If the two sides accept the outcome, the election could mark a major advance for democratic rule, says Bismarck Rewane, head of Lagos-based Financial Derivatives Co. “For the first time Nigerian rulers would understand that they are employed by the people, and that if they don’t perform they could be voted out,” he says.
Although ethnicity looms large in Nigerian politics, given the divide between the largely Muslim north and the predominantly Christian south, the race has seen some moves across sectarian lines. Buhari is a northerner but has picked up endorsements and support from Jonathan’s southeastern region, including from Rotimi Amaechi, the governor of Rivers State, who led seven of the country’s 36 governors in defecting from the ruling party in late 2013.
Two-party politics promises to boost accountability by making it harder for the government to bury bad news. The opposition is demanding full disclosure of an outside audit of the Nigerian National Petroleum Corp., the state energy company. In February 2014 then-governor of the Central Bank of Nigeria, Lamido Sanusi, accused the company of defrauding the government of some $20 billion in oil revenue. Two weeks later Jonathan suspended Sanusi for the rest of his term.
The new central bank governor, Godwin Emefiele, is widely seen as less independent than his predecessor. The central bank has burned through more than $7 billion in reserves since September in a bid to defend the currency, reducing those reserves to $32.4 billion on February 18. The naira fell nearly 17 percent during that period, to roughly 199 to the dollar on February 19, but many analysts believe it should fall further because of the collapse in the price of oil, which generates 90 percent of export earnings and 70 percent of government revenues.
The central bank has also tweaked its rules to make it harder for foreign investors to sell their naira-denominated assets. “You used to be able to get your money out quickly, and you’d wait a day or two,” says Oyin Anubi, sub-Saharan Africa economist at Bank of America Merrill Lynch in London. “Now it’s taking a week or maybe more.”
In January, JPMorgan Chase & Co. said it was considering removing Nigerian bonds from its bond indexes because of a drop in liquidity. The following month Standard & Poor’s Corp. said it was reviewing the country’s BB– credit rating because of political risk and lower oil prices. The government’s benchmark dollar bond due in 2023 was trading at a yield of 7.4 percent on February 16, roughly 1.1 percentage points higher than Kenya’s 2024 bonds, which carry a lower, B+ rating.
The good news for Nigeria is that public debt stands at just 12 percent of GDP, and Anubi predicts a modest deficit of 3.6 percent of GDP this fiscal year. A successful election might allow those fundamentals to lure investors back.
“The dollar-denominated debt is starting to look interesting at these levels since Nigeria is unlikely to experience problems meeting their external debt obligations,” says Brett Rowley, an emerging-markets analyst at TCW Group in Los Angeles. •