NIGERIA IN 2020: MEGA-TESTS FOR

THE ECONOMY AND SECURITYPatrick Smith & Stuart Culverhouse

29 January 2020

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OUR WORK

WE ARE A STRATEGIC, POLITICAL AND

INTEGRITY RISK CONSULTANCY

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SERVICES

POLITICAL RISK

1COUNTRY RISKS AND OPPORTUNITIES

OFF-THE-SHELF PUBLICATIONS

2STAKEHOLDER MAPPING

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BESPOKE MONITORING3

MULTI-COUNTRY BENCHMARKING

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SCENARIO ANALYSIS5

BUSINESS INTELLIGENCE

7INTEGRITY DUE DILIGENCE

STRATEGIC INTELLIGENCE GATHERING

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FRAUD AND CORRUPTION INVESTIGATIONS

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CRISIS RESOLUTION 10

MARKET, SECTOR AND COMPETITOR ANALYSIS

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STRATEGIC ADVICE

12PARTNER SELECTION AND MATCHMAKING

ARBITRATION AND LITIGATION SUPPORT

13 COMPLIANCE AND SANCTIONS ADVISORY

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BROAD GEOGRAPHIC REACH

SINCE 1979 WE’VE PRODUCED OVER

6,500 IN-DEPTH PIECES OF BESPOKE

AND OFF-THE-SHELF POLITICAL RISK MONITORING AND ANALYSIS

COVERING OVER 100 DIFFERENT

COUNTRIES, AND DELIVERED TO

OVER 1,500 CLIENTS

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NIGERIA FOCUS

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NIGERIA POLITICS & SECURITY

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Speakers

Patrick Smith — the editor of Menas Associates’ Nigeria Focus; Africa Confidential; and Africa Report — lives in Paris and spends about half the year reporting from Africa. He has been one of the world’s leading experts on Nigeria for over 30 years and was based in West Africa as a correspondent for Associated Press and the BBC for a decade.

Stuart Culverhouse — is the Chief Economist and Global Head of Fixed Income Research at Tellimer. He joined the company (formerly known as Exotix) in 2006 after ten years in the UK Government Economic Service, where he worked in HM Treasury and the UK’s export credit agency. He is a recognised expert in developing markets and sovereign debt restructuring, with 20 years emerging markets’ experience, and his geographical coverage includes Latin America and the Caribbean, Sub Sahara Africa and Eastern Europe. He has an MSc in Economics from Southampton University and previously worked at Goldman Sachs (London).

NIGERIA IN 2020: MEGA-TESTS FOR

THE ECONOMY AND SECURITYPatrick Smith

29 January 2020

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POLITICAL LANDSCAPE

President Muhammadu Buhari and ruling All Progressives’ Congress dominate the executive and the National Assembly and control a majority of the 36 state governments.

Security clashes — fuelled by resource fights, local political and the climate crisis — more critical and widespread than at any time since the end of the civil war in January 1970.

The APC controls the Presidency with: extensive powers of patronage; the Senate presidency; the House of Representatives speaker; and most of the sub-committees which scrutinize and develop policy.

Barring health problems Buhari (77) will be in power until 2023. He has ruled out amending the constitution to seek a 3rd term but wants his legacy to include: a rebalancing of the economy away from oil and imports; a strengthening of the security forces; and a reduction in corruption and illicit financial flows.

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POLITICAL LANDSCAPE

Buhari promises electoral reforms. APC wants to go further on constitutional change by devolving power over money and security to the 36 states. There are fierce opponents of state governments boosting their security powers.

A regional security initiative to combat kidnapping and herder-farmer clashes — known as Ametokun — in six Southwest states prompted criticism from Attorney General Abubakar Malami.

Since the 2019 national elections the APC also won Bayelsa and Kwara states. Edo and Ondo gubernatorial elections due this year will be critical for the fortunes of the PDP.

Role of the judiciary will come under more scrutiny after the Supreme Court: confirmed Buhari’s victory by 4 million votes in the Presidential election; validated several APC wins in state elections; but overturned an opposition PDP win in Imo State.

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THE TWO DOMINANT PARTIES

Both the ruling APC (ostensibly centre-left and economic nationalist) and the main opposition People’s Democratic Party (centre-right and pro-market) are factionalised.

This is more by internal fight over leadership positions than policy.

The chairmen — the APC’s Adams Oshiomole, and PDP’s Uche Secondus — are both under fire from their parties for their choice of candidate in the 2023 elections.

Both Oshoiomole and Secondus have presided over violent election campaigns with large sums of money thrown into the ring

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CONTENDERS FOR 2023 ELECTION

Nomination contest will be acrimonious because many want a generational shift but close allies of the two main 2019 candidates — Muhammadu Buhari and Atiku Abubakar — are unenthusiastic.

The APC front runners:

Vice President Yemi Osinbajo,

APC national leader, Bola Tinubu,

Kaduna State’s Governor Nasir el Rufai,

Ekiti State’s Governor Kayode Fayemi, and

Buhari’s former running mate Rev. Tunde Bakare as a longshot.

The PDP front runners:

former Vice President Atiku Abubakar,

Sokoto State governor Aminu Tambuwal and

Rivers State governor Nyesom Wike.

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POLICY ISSUES

Weak economic growth — forecasts of around 2.5% in 2020 which is about the same as the birth rate — and worsening unemployment.

Government has won backing for a US$35 billion budget in 2020 and another US$30 billion of local and international borrowing. Questions over sustainability of costs of debt servicing.

Revenue crisis. Low rates of taxation and inefficient collection. Nigeria’s tax revenue ratio of 7% of GDP is one of the lowest in the world and under half that of South Africa. It has to transition from an oil revenue distribution rate a tax collection state.

Conditions for industrialisation: international base line is electricity consumption of 300 kWh per person; an investment rate of 25% of GDP; and 70% adult literacy.

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POLICY ISSUES

Nigeria’s electricity consumption is about 150 KwH a head, investment levels at about 13% of GDP; and literacy rates ranging from around 50% to 95% in the south-west.

Command economics means the Central Bank compels commercial banks to lend to small-medium companies for productive activities such as agro-processing and manufacturing.

Land borders are closed for trade which is pressuring neighbouring states’ economies. The main target is President Patrice Talon’s government in Benin and large-scale rice smuggling.

The Central Bank uses foreign reserves to shore up the Naira against the US$; complex multi-tier exchange rates; and rations forex for defined priorities.

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OIL & GAS & POWER

Fuel subsidies — a logical consequence of the exchange rate policy — costs over US$2 billion a year; rewards importers of fuel and generators but penalises public power projects.

Reform and restructuring of state-owned enterprises: NNPC is key; need to boost production and revenue take.

Boosting inward investment in and beyond oil and gas sector. Nigeria has to increase production to at least 2.5 million b/d to benefit from Dangote’s 650,000 b/d oil refinery which is due to start operations in 2020.

Push to enact governance reforms mooted in Petroleum Industry Bill (PIB) includes: restructuring NNPC and revision of the terms of Production Sharing Contracts.

FID or NLNG’s Train-7 export project on Bonny Island. NLNG is most profitable project in the hydrocarbon sector.

Government to review privatisation of power sector as state-owned Nigeria Bulk Electricity Trading company accumulates debts and has been bailed out with US$5.5 billion of federal funding.

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LEGAL DISPUTES AND FINANCIAL

INVESTIGATIONS Fine of over US$1 billion by the US Department of Justice and

Securities & Exchange Commission (SEC) on Western contractors such as Halliburton, Technip, Snamprogetti and the Japanese Gas Corporation for fraud and contract mispricing on the US$6 billion LNG plant on Bonny Island.

Nigeria’s corruption and fraud cases has set a new records for multi-jurisdictional cases.

Elements of the case are still being litigated two decades after the plant was commissioned. Attorney General Abubakar Malami has said his department is reviewing a list of senior Nigerian politicians and officials who benefited from corruption on the LNG construction contract.

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LEGAL DISPUTES AND FINANCIAL

INVESTIGATIONS There are several other, similarly stratospheric legal cases:

• P&ID, an Irish-registered construction company, is claiming over US$9 billion in damages from the federal government for failing to provide gas feedstock for a processing plant in south-east Nigeria. The case is currently being fought out in the British and Nigerian courts.

• The current OPL245 case in Milan sees 9 Shell and ENI executives facing charges of fraud and bribery to enable their companies to win control of one of Africa’s richest oil blocks.

• Former oil minister Diezani Alison-Madueke. Her travel documents have been held by the UK authorities for 4 years compelling her to remain in London pending the outcome of a police investigation into claims of systematic contractual fraud with IOCs and international commodity trading companies.

• Claims by Nigeria’s revenue service of historic tax evasion at state and federal level by IOCs amounting to tens of billions of dollars.

None of these cases are likely to be settled soon and the government has to calculate what their effect will be on efforts to persuade investors to help ramp up future national oil production.

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THE SECURITY NEXUS

Over the last decade, the security threats have changed and multiplied.

Insurgencies by Islamist militias in Northeast have drawn in regional and international factions

Faster pace of criminalisation — bank robberies and cattle rustling in northern states — as police retreat

Clashes between herders and farmers in the north-central region over water and scarce grazing land

Militant groups demanding resource control in the Niger Delta where oil-smuggling rackets capitalise on the chaos

Resurgence of Southeast secessionist groups 50 years after the end of the civil war

Piracy in the Gulf of Guinea

Government has launched National Security Strategy, envisaging reforms to the armed forces and police. Police force lacks the numbers and resources to restore civil authority in areas from where insurgents have been expelled.

NIGERIA IN 2020: MEGA-TESTS FOR

THE ECONOMY AND SECURITYStuart Culverhouse

29 January 2020

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OVERVIEW

No major changes expected in near term

2020 provides a window of opportunity for reform, although we deem chances of that as low

Economic vulnerabilities

Buhari’s re-election guarantees status quo=> continuation of “sub-par” performance

Clear run in election cycle Buhari administration controls the legislature

Including from oil dependence, low growth, fiscal weakness, rising public debt and dependence on foreign capital, and FX

Political manoeuvring ahead of the 2023 election cycle presents risks, as does 2023 election itself, although that is too far away for now

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STATUS QUO: MODERATE GROWTH

AND STICKY INFLATION

Real GDP growth (% yoy)

Source: Haver

CPI inflation (% yoy)

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2014 2015 2016 2017 2018 2019

6

8

10

12

14

16

18

20

2014

2015

2016

2017

2018

2019

2020

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MACROECONOMIC POLICY

“ON HOLD”

Monetary policy rate (%)

Source: Haver

FX rates (Naira/US$)

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

2014

2015

2016

2017

2018

2019

2020 100

150

200

250

300

350

400

450

500

550

2014

2015

2016

2017

2018

2019

Official rate (IFEM)

Market rate (BDC)

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EXTERNAL AND FISCAL

BALANCES ARE WEAK

Current account (US$ bn)

Source: IMF WEO. General government balance.

Fiscal balance (% of GDP)

Source: Haver

-5

-4

-3

-2

-1

0

1

2

3

4

5

2017 -

Q1

2017 -

Q2

2017 -

Q3

2017 -

Q4

2018 -

Q1

2018 -

Q2

2018 -

Q3

2018 -

Q4

2019 -

Q1

2019 -

Q2

2019 -

Q3

-6

-5

-4

-3

-2

-1

0

2014 2015 2016 2017 2018 2019f 2020f 2021f

Fiscal balance (gen govt) Primary balance (gen govt)

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AND THERE ARE STRUCTURAL

FISCAL WEAKNESSES TOO

Low revenue base (%)

Source: IMF. FGN interest as share of FGN revenue.

High interest costs (%)

Source: IMF WEO. Gen govt revenue/GDP

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e

Angola Ghana Kenya Nigeria SSA EM

56

57

58

59

60

61

62

63

64

2016 2017 2018 2019e

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PUBLIC DEBT IS LOW,

…BUT RISING

Public debt (% of GDP)

Source: Bloomberg. *Gross issuance.

Sovereign Eurobond issuance* (US$ bn)

Source: IMF WEO

15.0

17.5

20.0

22.5

25.0

27.5

30.0

32.5

35.0

2014 2015 2016 2017 2018 2019f 2020f 2021f

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017 2018 2019

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BUT BOND YIELDS

ARE LOW

Eurobond yields (%, 10yr US$ benchmark*)

Source: Haver

T-bill yields (%)

Source: Bloomberg. *7.143% 2030

0

2

4

6

8

10

12

14

16

18

20

2017 2018 2019

3m 6m

6.0

6.5

7.0

7.5

8.0

8.5

9.0

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ALTHOUGH NIGERIA’S COUNTRY RISK

REMAINS HIGH RELATIVE TO OTHERSEM sovereign bond spreads* (basis points)

Source: Haver. *EMBIGD

200

300

400

500

600

700

Angola

Ghana

Nigeria

Senegal

Ivory Coast

South Africa

EMBIGD

Kenya

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RISKS

Upside risks

Downside risks

Reform window Completion of Dangote oil refinery Improved business environment could boost growth

Politics Security Oil prices/production Weak underlying fiscal position and poor debt dynamics Vulnerability to global financial conditions and increasing

dependence on short-term foreign capital Currency devaluation

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Q&A

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