The worsening security trajectory in northern Nigeria – and President Jonathan’s inability to counter the threat effectively – has no immediate market impact in a narrow sense. However, it carries substantial political and policy risks for President Jonathan and his reform agenda. The Boko Haram crisis reinforces policy stasis, weakens Jonathan’s political standing (and capital) and accelerates our expectations of broader downside risks materialising before 2014. Policy-wise, the security crisis and ongoing power struggle between President Jonathan and governors reinforces our scepticism about fuel subsidy cuts this year or the smooth operation of a robust Sovereign Wealth Fund (SWF) that can safeguard oil revenue heading into the 2014/15 election cycle. The political and security dynamics further complicate passage of the Petroleum Industry Bill (PIB) this year, which looks increasingly unlikely despite enormous opportunity costs for industry, oil-fuelled growth and government revenues.
If, as has happened, the Nigerian Governors’ Forum (NGF) re-elects Jonathan rival Governor Amaechi as we expected, the prospects for PIB passage this year will dim further. Jonathan will not be able to pass tough reforms including the PIB and stronger safeguards on the Excess Crude Account (via a robust SWF) without a critical mass of support from governors, who are locked in the usual ‘zero sum’ stalemate over revenue-sharing in the PIB.
The state of emergency in three northeastern states does not present an immediate market-relevant risk because these regions are an economic hinterland, largely disconnected from the growth drivers in Lagos and the Niger Delta. Still, the instability in the northeast should not be discounted as noise given its potential to spread elsewhere in the north, the agricultural heartland in the middle-belt states and capital Abuja (please see Eurasia Group Note – NIGERIA: Boko Haram’s northeastern assault and Nigeria’s three-tiered stability threat). Even if state of emergency drives Boko Haram and offshoot Ansaru underground for a few months, the threat will resurface in these regions and may escalate in areas that are more closely integrated into the Nigerian political economy. In addition to Abuja, Boko Haram may target longstanding powder-keg cities (like Jos or Kano) in central Nigeria where sectarian and ethnic fault lines run especially deep. Provocations there can descend quickly into a dangerous cycle of reprisals outside of the government’s control.
We still do not expect major attacks on Lagos or the Niger Delta because Boko Haram has very thin support or manpower or infrastructure in the south, but this low-probability high-impact threat cannot be entirely discounted. The controversial declaration of a state of emergency, while popular in parts of the south, will further antagonise governors who are strongly resisting executive branch intervention in their state fiefdoms. This declaration, together with a recent pattern of heavy-handed presidential challenges to gubernatorial privilege, is meant as a show of force to instil better discipline among ruling PDP governors and to put opposition governors on notice that Jonathan has sticks as well as carrots at his disposal (please see Eurasia Group Note – NIGERIA: Jonathan’s heavy-handed efforts to consolidate governors’ support may backfire).
In the polarised climate that has characterised executive-gubernatorial relations in recent months, the emergency declaration made with minimal consultation with local officials will probably feed the anti-Jonathan factions both in the opposition and the ruling party. This makes a defiant re-election of Jonathan nemesis Amaechi as head of the NGF a reality. This is a psychological blow for President Jonathan, and a further setback to elements of his reform agenda that can only pass with the governor’s support, such as subsidy reform, a true restructuring of the Excess Crude Account via SWF safeguards, and the stillborn PIB.
More headwinds for PIB passage
While the PIB has scaled two parliamentary readings this year and seen a nationwide barnstorming effort to drum up grassroots support ahead of parliamentary debate scheduled to resume in a few weeks, the outlook for passage is deteriorating. Putting aside the resource and attention-draining security initiatives that will dominate the executive branch and the continuing lack of presidential leadership on the PIB (unlike in the power sector), politicians are increasingly viewing the new revenue-sharing formula through a zero sum prism that discourages compromise.
The Host Community Fund, which is meant to transfer 10 percent of post-tax profits to local oil communities, has become a major political football and likely deal breaker for many MPs. The Niger Delta communities insist on a narrow definition of host communities to only include oil producing regions while MPs from Lagos, the north and elsewhere (and their governor sponsors) are lobbying aggressively for ‘host communities’ in this context to include communities that have major midstream and downstream assets like pipelines or refineries. Delta representatives who comprise Jonathan’s core base reject this idea out of hand, seeing it as a dilution of their rightful revenue share, which they have seen as long overdue and all but assured under their first native son president. The Jonathan administration is likely to reject a broadened scope for the Host Community Fund, putting him further on a collision course with non-Delta governors and MPs.
While there still may be a pathway to a partial PIB, as we have long argued, that would just tackle fiscal changes for industry (not regional revenue sharing or NNPC restructuring), current trends do not look constructive for such an outcome in the short term. The Jonathan administration, which is more focused on staving off a PDP primary challenge in 2014 and winning re-election in 2015 against a unifying opposition coalition, simply has too many higher-priority items on its agenda, including power sector reform and bolstering northern security. These agenda items are considered essentials in Abuja whereas the PIB appears to be in the category of ‘nice to have’ not ‘need to have’; without unambiguous presidential leadership and a critical mass of governor support, the upcoming PIB debate will be noisy but once again inconclusive.
The big picture
Taking a step back, our broad view has been cautiously constructive on Nigeria for 2013, but with an expectation of deterioration by the first half of next year. This has been predicated on the partial reform momentum in sectors like power, banking, and capital markets, and the prospect for at least partial oil reforms, anchored by a capable economic team stewarded by Finance Minister Ngozi Okonjo-Iweala and Central Bank Governor Lamido Sunusi. Sanusi’s departure in the first half of 2014, together with a hotly contested campaign season likely triggering a rise in profligacy and political violence underscore our worsening expectations for next year.
However, the escalating security crisis in the north, which could turn the region even more decisively against Jonathan, together with the bruising power struggle between the executive and governors (with negative fallout likely for the PIB) suggest that the macro-level downturn may well start in the second half of 2013. If so, this will likely take new portfolio investors in Nigeria, seduced by attractive but somewhat misleading debt and growth statistics, by surprise, and could trigger faster-than-expected ‘hot money’ outflows.
PHILIPPE DE PONTET
De Pontet is director, Africa for Eurasia Group.