BMI On The Ground In Lagos And Abuja

BMI visited Lagos and Abuja in early June, where we met a range of stakeholders including the Central Bank of Nigeria (CBN), the Nigeria National Petroleum Corporation, and several of our major banking and corporate sector clients. The majority of the people we spoke to agreed with our upbeat expectations for economic growth over the next five years: We forecast average annual average real GDP expansion of 7.0%.

However, the trajectory of monetary policy under the new central bank governor, and political risk, which is rising ahead of the February 2015 elections, were two recurring topics of discussion and are viewed as the most salient risks to the economy. Although our optimistic take on reforms in Nigeria's power sector was largely shared, the generally woeful state of physical infrastructure is viewed as major obstacle to economic development.

New Central Bank Governor Raises Questions

A major topic of discussion was the outlook for inflation, the naira currency and interest rates under new CBN Governor Godwin Emefiele. Just prior to our visit, Emefiele made a speech in which he outlined seemingly contradictory goals of lowering interest rates and ensuring currency stability. Many of the people we met agreed with our view that, given Nigeria's current macroeconomic fundamentals, these aims are mutually exclusive. Foreign currency reserves have been declining steadily over the last 18 months, indicating pressure on the external accounts. A lowering of interest rates would exacerbate this issue, as it would lead to a reduction in foreign flows to the bond market and greater liquidity in domestic money markets, both of which would place further pressure on the naira. At this stage, we think it is unlikely that the monetary authorities will loosen policy before the election, and we therefore think that the interest rate/naira dilemma will only play out after the vote in February 2015.

In his statement, the new governor referred to some of the structural, non-base-rate issues such as information asymmetry and poor corporate governance that are keeping bank lending rates elevated. His plan to try to address these is positive, although it will take some time for any changes to become effective.

Some of our clients in the food and drink sector were interested to know what impact the CBN's efforts to increase access to and reduce the cost of financing for small and medium size enterprises (SMEs) might have on their competitive positions. Our response was that this is a challenging goal that will take some time to achieve, especially in the current economic and political climate. We therefore believe that SMEs are unlikely to markedly alter the competitive landscape for the time being.

Political Risk About More Than Just Elections

The other major topic we discussed was rising political risk. Security at the entrances to buildings and public areas has been ratcheted up amid concerns about attacks from the terrorist group Boko Haram. Although there was some acknowledgement that the deteriorating security situation is part of the electoral cycle as the February 2015 elections approach, there is a sense that the emergence of Boko Haram has greatly exacerbated the usual threat associated with elections. At the heart of Nigeria's political woes is an ongoing battle for power among the country's various ethnic, religious and geographic groupings, with the rivalry between northerners and southerners being the clearest broad division.

Some people we spoke to felt that the Boko Haram threat is being caused, or at least exploited, by certain northern politicians who are concerned about the prospect of another term for President Goodluck Jonathan, a southerner. These people said the politicians are looking to make the country ungovernable in a bid to prevent Jonathan from securing a second term. Security risks will therefore remain pertinent until the election at least.

Even then, we do not believe that political risk will necessarily dissipate. A victory for Jonathan – or any other southerner for that matter – will see northern frustrations continue. On the other hand, if a northerner wins the presidency, militancy in the southern oil-producing region, which has subsided during Jonathan's presidency owing to his being from the region, could re-emerge. Ultimately, we believe that competition for power between different groups will remain a threat to stability until there is devolution of power away from Abuja.

As regards the 2015 election, neither the ruling People's Democratic Party (PDP) nor the All Progressives Congress have announced their candidates. There were 'Jonathan 2015' campaign posters in the streets in Abuja; however, given that no formal announcement has yet been made, these will have almost certainly been posted by the president's supporters (with or without his knowledge) rather than by his team. The outcome of the election is equally uncertain. For the first time in the party's history, a victory for the PDP is not guaranteed, owing to internal wrangling, dissatisfaction with the government's response to security threats, and the recent unification of the opposition. A great deal will depend on final candidate selection.

Infrastructure Constraints

Readers who have visited Lagos will be familiar with logistical challenges caused by the sprawling city's inadequate physical infrastructure. Bottlenecks on the three bridges connecting the mainland to Lagos and Victoria Islands are a daily occurrence at rush hour; the 30km journey between Ikeja on the mainland and Victoria Island took more than three hours on one evening during our visit. For many Lagosians, these traffic difficulties are an accepted part of daily life, as they are in many other emerging markets around the world. They nonetheless lead to a significant loss of productivity. Although the first phase of a light-rail mass transit line is under construction and a second phase is in the planning stage, the scale of the traffic problem is such that the new railway is unlikely to make a meaningful impact. We therefore expect traffic congestion to remain a problem for the foreseeable future.

Frequent power outages are another infrastructure challenge associated with Lagos and Nigeria in general. The hum of the private generator, which is Lagos's unofficial soundtrack, remained pervasive during our visit. However, we are more optimistic that progress will be made in the power sector than in transport infrastructure, thanks to an ongoing privatisation drive.