Elections are widely viewed as synonymous with macroeconomic turbulence. Even when there are few obvious differences in policy between the main protagonists, as in Nigeria today, the politicians play on the fears of the electorate. They simultaneously warn of the unfolding of a nightmare scenario if their opponents were to win power and make vague spending pledges in an attempt to keep the voters onside. To give an example of this conjuring trick from the UK, the Conservative Party is arguing that the opposition Labour Party cannot be trusted with the public finances while seeking to reassure the British electorate that the health and social services will be safe under its stewardship. This familiar combination is unpopular with financial markets.
At the same time, economists adjust their forecasts to incorporate some macro slippage in the run-up to elections. This loss of discipline is common but only rarely to the extent that some analysts would have us believe. Zimbabwe is an exception. If we take the case of Nigeria and the polls in 2011, the damage was manageable (and the policy differences were negligible).
Average annual inflation picked up from 12.5 per cent in 2009 to 13.7 per cent in 2010 and then slowed to 10.8 per cent the following year. Admittedly the FGN deficit soared from N440bn in 2009 to N1.34trn the following year before easing to N890bn in 2011. At the same time, the FGN’s domestic debt grew strongly in 2010, from N3.23trn to N4.55trn, although fortunately off a low base. This slippage can be traced to the healthy pay rises awarded to government employees in 2010.
Nigeria enjoyed another piece of good fortune at the peak of the last electoral cycle. The average spot price of Bonny Light grew strongly from US$64/b in 2009 to US$81/b in 2010, and US$114/b in the year of the polls in 2011. Nigeria votes next month, and the oil prices have moved sharply in the other (wrong) direction. Bonny Light averaged US$98/b last year, and our forecast for 2015 stands at US$58/b, with a year-end figure of US$65/b. Some forecasts in the market are still more brutal.
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Markets are nervous not because of the elections per se but because of the impact of the oil price collapse on an economy not prepared for the proverbial rainy day (when there might otherwise have been substantial fiscal buffers for this eventuality). On the assumption that the elections do not descend into widespread violence and that any challenges to the results are largely confined to the courts, we offer some pointers as to the operating environment for the new administration.
We also assume that any attempts to abandon discipline, charm the electorate with spending pledges and add substantially to the FGN’s debt would be resisted by the federal finance ministry, the CBN and reform-minded ministers. Such a lapse was possible in 2010 with a very low debt burden. Today yields on Nigerian sovereign Eurobonds are wider than those on African non-oil issuance with lower credit ratings.
The main change in the post-election operating environment will be the steep cut in the FGN’s capital expenditure. The approved 2014 budget projected a total of N1.55trn including SURE-P while the FGN’s proposals for 2015 in mid-December set a figure of N630bn. We know that capital spending generally falls short of target, and that the CME said just N610bn had been released as at the end of October.
However, we point out that the spot price of Bonny Light has fallen by a further US$20/b since the proposals were taken to the National Assembly and that the final version of the budget is likely to trim capital spending again. The CME has warned that some MDAs will receive zero allocations for capital items.
At the start of a four-year term, the new administration will have the opportunity to make some lasting policy changes. The most obvious is the removal of fuel subsidies. The risible argument that the present system is somehow “pro-poor” does not wash when the consumer would find the price of PMS at the pump lower than the set retail cost of N97/l if the FGN deregulated today. This calculation allows for the various fees on top of the landing cost.
Our wish list is long: the passage of a petroleum industry bill, the replacement of the excess crude account with a ring-fenced sovereign wealth fund, the setting of the oil industry assumptions for the budget by an independent body, harmonised metering of oil production, an increase in VAT and in the remuneration of revenue collection officials, and support for the migration of the power industry into the private sector. A common theme is that the steps would assist in the dismantling of the rentier economy.
Such lists are long, and fulfilled, at best, in part. Unlike some other oil producers like Angola, Nigeria does have the necessary platform in place. Its non-oil economy accounts for about 90 per cent of GDP (at both current and constant prices in Q3 2014). It therefore has the productive base which could deliver both the tax revenues and the balance-of- payments benefits to achieve diversification of the economy in the fullest sense. While we have some concerns about the repercussions of a close result in the elections, we view the polls as an opportunity for the new administration in straitened fiscal circumstances to start the job in earnest.
