New Threats Slowing Progress

Proshare

Wednesday, August 03, 2016 06.14 PM / ARM Research

Focus shifts today towards developments on the domestic policy review in ARM’s core strategy document – the “Nigeria Strategy Report H2 2016”; looking at the socio-political landscape over the last six months and the outlook for the rest of 2016

Barely a year into the enthusiastic change of baton at Nigeria’s political helm, developments on the socio-political front continue to emit muted signals to warrant initial optimism. Starting with the submission of a budget document laced with summation errors which delayed its passage to fresh insecurity challenges and uncelebrated currency policies, the first six months of 2016 has largely served to douse investor optimism. So far, the new administration’s vigorously pursued anti-corruption crusade has done little to revamp market sentiments, which remained bearish as insecurity worries expanded back to the Niger Delta creeks. That said, the increasing amount of recovered stolen funds suggests that the current anti-corruption drive holds some promises on Nigeria’s fiscal front.  However towards the end of H1 2016, adoption of pro-market policies on fuel and currency has provided promise about more firm footed policies going forward.

Key Developments in Domestic Economic and Policy Environment

Barely a year into the enthusiastic change of baton at Nigeria’s political helm, developments on the socio-political front continue to emit muted signals to warrant initial optimism. Starting with the submission of a budget document laced with summation errors which delayed its passage to fresh insecurity challenges and uncelebrated currency policies, the first six months of 2016 has largely served to douse investor optimism. So far, the new administration’s vigorously pursued anti-corruption crusade has done little to revamp market sentiments, which remained bearish as insecurity worries expanded back to the Niger Delta creeks. That said, the increasing amount of recovered stolen funds suggests that the current anti-corruption drive holds some promises on Nigeria’s fiscal front. However towards the end of H1 2016, adoption of pro-market policies on fuel and currency has provided promise about more firm footed policies going forward.

Anti-corruption drive eventually yielding fruits

Within a year of coming to power, the current government has recovered nearly N130 billion of looted public funds and obtained interim forfeiture orders on non-cash assets (land, buildings and vehicles) valued at N2.9 trillion. Moreover, the FGN concluded arrangements with the governments of Switzerland, UK, USA and UAE for the repatriation of more than N940 billion of corruption proceeds stashed away in those countries. In all, if the monies under interim forfeiture and those abroad are collected, the government would have succeeded in recovering over N3 trillion about half of the 2016 budget. In that sense, the president’s drive to recover stolen public funds appears to be yielding fruit.



The President’s foreign trips: jamboree or proper socio-political engagement?

The President extended his globetrotting into H1 16 with 13 additional travels over the period bringing cumulative foreign trips since to 30 since stepping into office. The frequency of the foreign trip, at a time of dwindling resources and heightening insecurity, generated significant debate, in terms of general value derived and specifically whether this was the sole focus of the government. Notwithstanding, it is clear important decisions were reached, some of which could prove significant in terms of a plan to put the economy on sustainable footing long-term. Amongst many others, the president’s trip to China and African neighboring counties were quite significant as several terms which could have far reaching implications were agreed upon. The visit to China gave birth to a $6 billion loan offered to Nigeria to fund infrastructure projects, agreements primarily focused on infrastructural developments—totaling $6.4 billion— which captures the $2.5 billion Lagos Metro Rail Transit Red Line project and the $1 billion development of a Greenfield expressway for Abuja-Ibadan-Lagos, scheduled for completion in four years. Beyond tackling corruption, the trips to neighboring African countries including Chad, Cameroon, Niger gave birth to the creation of a Regional Force whose coordinated offense has helped turn the tide decisively against Boko Haram with attack frequency sliding to multi-year lows.
 



Insecurity assumes more worrying dimension

While the Boko Haram menace appears to be subsiding, insecurity assumed a more disturbing dimension in H1 2016 starting with a series of violent clashes between herdsmen and locals in several parts of the country. Worryingly the attacks transcended geographical boundaries, as attacks were recorded in locations away from the historical middle belt epicentres to southern states like Enugu and Edo. At least over 300 persons are reported to have killed, 250 homes destroyed and left many displaced in recent clashes in Benue State.

Rather than directly tackling the menace as an insecurity issue, the FGN resorted to moving ahead with plans hatched under previous governments to establish grazing reserves across the country with seed money of N940 million. Unsurprisingly, the FGN response has drawn the ire of some southern state governors which accused the Buhari administration of an ethnic slant and kicked against the plan. In addition to loss of life, herdsmen attacks hurt food production in the Middle Belt, long seen as food basket, and likely accentuated current upswing in local grain prices.

Barely had the dust from the herdsmen attacks settled, fresh insecurity issues flared up in the Niger Delta with the resumption of attacks on oil installations by militants under a new group called the Niger Delta Avengers (NDA). Citing long-standing concerns about environment pollution and resource control, the NDA targeted various oil production platforms resulting in force majeure across major export terminals (TransForcados, Bonny and Qua Iboe) leading to a drop in mean crude oil production to 2.11mbpd in Q1 16 (Q4 15: 2.2mbpd).

The NDA attacks inspired copycat assaults by similar groups on oil installations, which extended to include gas pipelines leading to prolonged power outages in H1 16. After initially sounding hawkish in response the attacks, with reports about orders to military to bombard the region, President Buhari adopted a more conciliatory stance, seeking to open negotiations to address the issues. That said, as most of the militant agitations are unchanged from the past, we think the fresh insurgency stem from proposed cuts in Niger Delta amnesty payments under the 2016 budget.

Overall, the FG’s inability to come to grips with the security issues and wrong-footed responses to the crises did little to improve investor perception regarding economic policy decisions. Indeed impact of the weak handling of the issues on agriculture and crude oil GDP indirectly contributed to onset of recessionary growth conditions across the economy in H1 16.

Flexible currency and fuel policies show flicker of hope on credible policy decision making

After holding out for nearly a year on the FX, the CBN, after obtaining the fiscal nod, announced the move to a floating exchange rate regime. The move which resulted in 43% depreciation in the naira marks a volte face by the presidency on the FX policy. Following on from 66% hike in retail PMS prices in May 2016, which included a shift to more flexible price mechanism, the change in currency stance provided firm hints about a change in policy inclination of the Buhari administration. While increasingly difficult revenue realities could have forced a shift anyway, the adoption of flexible exchange policy as opposed to devaluation suggests a change at heart

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