Focus shifts to Buhari’s Economic Team as Revenue Crisis Rages

Investors are waiting to see the newly sworn in Nigerian president’s economic team to get a sense of the policy direction of the new government, just as a revenue crisis that has curtailed the state’s ability to spend rages on.

President Muhammadu Buhari who was sworn into office two week ago has yet to appoint his cabinet.

The Organisation of Petroleum Exporting Countries (OPEC), on Friday decided to hold production levels at 30 million barrels a day, a move which some analysts see as being bearish for oil prices which are down 45 percent in the past year.

One of the biggest challenges the new government faces is diversifying its economy away from its significant reliance on oil, to support its fiscal expenditure, especially on capex.

“There has been a lot of talk about lifting the oil subsidy and what happens next will be a litmus test as to what the new government plans to do,” says Andrew Alli, chief executive of Africa Finance Corporation, which finances infrastructure projects across the continent.

“I believe an immediate abolition with a six month window would be the best thing to do.”

The fuel subsidies which cost as much as $6 billion per annum, have bled government finances without much upside for Nigerian consumers who mostly purchase petrol above the control price across much of the country.

The International Monetary Fund (IMF) forecasts the economy to expand 4.8 percent this year, down from 6.3 percent in 2014.

The number of Foreign Direct Investments (FDI) projects in Nigeria fell by 17 percent in 2014, according to a June 2 report by accounting firm, Ernst and Young.

Among decisions keenly watched by investors are the people to fill the key portfolios of Finance, Power, Agriculture and Energy.

“Buhari and his team…have an opportunity to send a clear signal of their intent,” Keith Richards, chairman of consumer goods firm, Promasidor Nigeria, said.

“Building early momentum with symbolic quick wins will give the new team credence and positive public sentiment and buy them time for tougher longer term decisions.”

Nigerian equities have given up gains after initial euphoria over the Buhari victory, as the weak economy foreshadows second quarter earnings.

Since hitting a five month high of 35,728 points on April 02 (the first trading day after presidential elections) the Nigerian Stock Exchange (NSE) benchmark index has given up 5.7 percent of their gains to close at 33,664 points on Friday.

The NSE, which is the largest exchange in Sub Sahara Africa, after South Africa’s JSE, has a market capitalisation of $57.8 billion (N11.454 trillion), and saw a net foreign outflow of $151.5 million (N30 billion) between January and April 2015, according to data from the bourse.

Foreign participation fell to 50.25 percent of all transactions in April 2015 down from 64.48 percent a year earlier, as investors fled Nigeria’s deteriorating macro environment and uncertainty over elections.

Nigeria’s oil production is estimated to be close to 1.8 million barrels a day, which is below the federal budget target of 2.3 million b/d, according to Renaissance Capital’s SSA economist, Yvonne Mhango, in a May 28 note.

This would have material implications on growth, dollar inflows and the naira, with the budget deficit expected to widen to 2.2 percent of GDP in 2015.

“Given that the incoming administration will be substantially resource – constrained, we think Buhari’s biggest challenge will be managing expectations,” Mhango said.