Africa Trends Matter – Nigeria

Dear Reader
This week is about the exciting and complicated case of Nigeria. We hope you find our views inspiring and useful. Please feel free to comment – either publicly or ask specific questions or request our scenarios or additional security analysis on:
Next week will be on the equally exciting case of Ghana, incl. our views of business prospects, how the economic crisis is playing out and whether the approach to the IMF will help.
  1. Continued growth for the short- and medium term. But, all in the south and with increasing risks as political and security situation deteriorates.
  2. The existing political settlement is reaching breaking point – to the extent where it threaten Nigeria’s cohesion and more practically the Lagos growth engine.
  3. Inequality/corruption is an increasing risk. Boko Haram is arguably a result of inequality, but exceptional levels of political corruption may drive further social unrest.
Status, July 2014
To watch
Present situation
Growth and macro-economy
Governance and security
Social develop
Global drivers
Second worst
Trend: ↘
Security worsening, Growth continues (Lagos driven),
Macro-economic stability continues →
Market size
Security concerns ↘
  • Game-changing security incidents (Lagos, airports, bridges)
  • PDP & APC primaries
  • Feb 2015 elections
  • Middle class expression of dissatisfaction (Lagos, Abuja), possibly backed by parliament

Business implications:

  1. Market size and strength: Growing. Still substantial gaps with opportunities for good returns.

  2. Security: Clear downward spiral. North already very risky. Substantial risks of spread deeper into the middle belt and possibly the South West.

  3. Politics: Few credible partners. Risks of reputational damage high.

  4. Contracts and contract sanctity: Formal legal frameworks are stable, but contracts and contract sanctity issues remain a serious issue driven by politics.

  5. Assets (staff, capital, profits): Harder to protect staff, incl. in hitherto relatively safe areas. Capital issues slightly deteriorating. Profits issues largely unchanged.

  6. Regulatory framework (legal, regulation, enforcement, consistency) stable at low level. Quality Petroleum Bill (PIB) will not pass soon – unless as part of political shenanigans.

Scenario status: We operate 4 core scenarios and in the special case of Nigeria we also have 4 parallel security scenarios. Overall, there are most features from the 3rd best scenario with a few features from the second scenario (macro-economic environment, growth) and an increasing number from the 4th scenario (security, politics, national coherence, institutional reform speed). There is a risk of moving to the 4th (state-failure -worst-case) scenario. The triggers would come from desperate acts (could be both Jonathan/PDP or the opposition) both during the October 2014 primaries and towards the February 2015 elections.

Politics itself is as brutal as ever. Jonathan under extreme pressure, but still going for PDP ticket. APC (opposition) power-struggles. All tricks will be used; instigating violence, use of ethnic and religious faultlines, state of emergency, threats, bribes and attempts to undermine the election commission.

Security is at its worst in more than a decade. We see our separate security scenarios at the border of worst-case scenario – with a negative outlook. Boko Haram is gaining confidence. The Niger Delta militias will demand further space from Jonathan in return for support. Local ethnic conflicts are intensifying. All possible due to years of corruption in the security forces and abuse by politicians willing to fund militias for short-term gains. A number of interlocutors point to the notion of Jonathan having an interest in Boko Haram creating instability in Northern Nigeria; this would enable either a state of emergency or low voter turn-out in his main opposition area.

Core to moving to a better scenario is building credibility in the election process and limiting violence, which would lay the ground for credible elections and potentially better leadership. Not easy given the context, as it will require restraint among all the major political leaders and Godfathers (political financiers).

Reforms, drivers and addressing root courses: Nigeria is undoubtedly the most complex country in Africa. Given the present status, progress will at best be slow. The present leadership and political elite is as much part of the problem as the solution. South-Western (Lagos) and Abuja urban middle classes increasingly demand action, but they are up against exceptional vested interest and can easily be split. Similarly, civil society may be a driver, but the core narrative remains poorly coordinated and overly interventionist in most places. The international community can drive some reform on the margins (eg. on corruption, trade and security).

A range of technical reforms – incl. business environment reforms are still making progress in some places, but otherwise the main force guarding against further deterioration is the combined elite interest in keeping Nigeria together. This group consists of former political leaders, generals and business men.

Big picture risk to watch: The immediate risk is wider state-failure, incl. further breakdown of law and order as well as more severe and geographically widespread security incidents. Beyond elections the main risk is the likelihood of a “low-level” equilibrium with “near failed-state features”, which in turn will also hit growth, incl. in Lagos.

Indicators, data and resources: We base our assessments on a range of indicators and resources. The World Bank CPIA, indicator of public sector quality: the Mo Ibrahim index (especially on business and rule of law) as well as the Failed States index are some of my key resources. We follow a large number of indices, Nigerian blogs and social media discussions on cost of doing business, corruption and quality of institutions. The rating agencies, in particular Moody’s and Fitch are useful, although we often find their analysis slightly behind the ball. Updates and analysis from Bloomberg, Control Risk, Oxford Analytica and Africa Confidential and outlooks for large corporate investors (Ernst and Young most recently) is also valuable.

For scenarios and understanding the fundamentals we are particularly inspired by Paul Collier, Lant Pritchard and much of David Booth’ findings. The actual scenarios are inspired by Matthew Burrow’s global trends as well as the UK and US global strategic trends analysis.

All of the above are publicly available sources.



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