EXPOSITOR | What is at risk for investors in Nigeria’s election?

Nigerian voters will go to the polls on the 25th of February, and international investors are hoping that whoever is elected will be the president of Africa’s most populous economy will be more market-friendly than the current government.

While there are also parliamentary elections, the focus is on the presidency. With incumbent Muhammadu Buhari not on the ballot, the main contenders are ruling party veteran Bola Tinubu, former vice president Atiku Abubakar, and third party candidate Peter Obi.

WHAT ARE MAIN ISSUES FOR INVESTORS?

Multiple exchange rates, widespread insecurity and low oil production due to massive crude theft are all problems that worry investors. Another focus is soaring fuel subsidy costs that devour government revenues and drive up debt.

Reform of the foreign exchange market is the number one concern for international equity investors, said Steve Pollicino of U.S. brokerage Auerbach Grayson, adding that uncertainty over how long it takes to get money out of Nigeria was a big deterrent.

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“No investor’s going to want to buy into a market where you can’t sell stock and get your money out,” he said.

Foreign investors held 16% of shares on Nigeria’s stock exchange last year, sharply down from 58% in 2014, Nigerian Exchange Group data showed.

Removing petrol subsidies, which cost $10 billion in 2022, is also key but a “hard sell”, said Babatunde Ojo, frontier emerging markets equities portfolio manager at Harding Loevner.

“This is the short-term pain you have to take in a long-term game,” he said.

Strong and clear regulation is important for international oil and gas companies, which are pivoting to cleaner gas, said Amaka Anku, head of Eurasia Group’s Africa practice.

WHAT ABOUT NIGERIA’S DEBT?

Nigeria’s debt-to-GDP ratio is low compared to countries with similar credit ratings. However, its debt servicing burden is among the highest globally, according to ratings agency Fitch. In 2022, the federal government spent 96.3% of its revenues paying interest, the IMF said recently.

Abubakar plans to seek “debt forgiveness”, while Obi has said creditors will be “engaged for debt restructuring and possible cancellation /forgiveness”.

“I believe that he used that word in a very liberal sense that is not the same sense that the markets give to that word,” Carlos de Sousa, an emerging market debt portfolio manager at Vontobel, said of Obi’s use of the word “restructuring”.

“If the question is, ‘Is Nigeria’s debt sustainable today?’ Absolutely yes, nobody has any doubt about that. Is it in a sustainable path? No it is not,” said de Sousa.

The next president will need to ramp up government revenues from a very low base to make debt manageable and provide citizens with services, said de Sousa, noting that none of the major candidates had pledged to raise taxes.

Many investors, however, were cautiously optimistic that Nigeria would see improvements, whoever wins on Feb. 25.

“President Buhari has set such a low bar,” said de Sousa. “It’s really not difficult to do things better.”

DO INVESTORS HAVE A PREFERRED CANDIDATE?

Few investors expressed a strong preference for who wins. All three main candidates propose variations of similar policies – FX reform, fuel subsidy removal or phase-out and boosting the economy.

A peaceful outcome is key for Nigeria which has suffered violence around elections in recent decades.

If Tinubu emerges as the winner, there would likely be “a smoother transition,” said Joe Delvaux, a portfolio manager at Amundi, which holds Nigerian sovereign bonds.

A victory for Atiku would probably mean more uncertainty as power shifts, said Delvaux. Many analysts see Atiku as more pro-business.

“If you have a candidate like Peter Obi coming in, the challenge will be that (the) machinery isn’t there,” said Delvaux. “So I cannot judge what capacity will be there on implementation.”

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