Nigeria’s Strongman Subsidy Contest

Nigeria’s MSCI stock market index pared its loss to 5 percent and Eurobond yields dipped almost 300 basis points to 5.5 percent as General Buhari returned to the presidency and his opposition party also swept state elections, but the leadership turnover was dogged by continued  oil subsidy and supply controversy at the state-owned petroleum company founded during his previous tenure. The Price Waterhouse report commissioned by the Finance Ministry was finally released by the outgoing administration and criticized a management “blank check” leaving billions of dollars in untracked funds, but could not cite an exact figure or attribute leakage to outright fraud as former central bank Sanusi claimed. Just before the inauguration gas stations experienced widespread shortages as refiners pressed for payment of outstanding bills, with the latest budget further cutting subsidies as the excess crude account also neared depletion.

Economic growth may be just 5 percent this year as foreign reserves were down 15 percent to below $30 billion and the current account could go into deficit for the first time in decades. The currency has rebounded from election delay woes, but remains around 200/dollar, and Boko Haram has opted for smaller-scale attacks amid reports that youth kidnapped from northern villages were freed in military operations. As the new president took office petroleum industry reform legislation was taken up in the Senate as movement gathers for maximum selloffs officials estimate could bring in $75 billion. Banks which have lent heavily to the sector may be in trouble according to S&P’s latest risk assessment dropping them on category. Dollar liability mismatches are another threat hurting share prices and the central asset management company is girding for another wave of bad assets after just entering a recovery phase from the 2008 crisis.

The ratings agency’s regional update also pointed to meager credit growth at South African banks as they face an onslaught of oversight and resolution changes with new legislation and the phase-in of Basel III prudential rules. The central bank and financial services board will have different responsibilities and subordinated bondholders could receive haircuts in future liquidations. The system will adopt a version of total loss absorbing capacity designed globally for the biggest most sophisticated institutions. Household debt service to disposable income at 75 percent will dent borrower appetite, and 2 percent GDP growth will maintain a sluggish pace. Unemployment is again over 25 percent, and the rand sank to 12/dollar on chronic power outages and mine worker unrest. Inflation has settled below 6 percent but may be under pressure from civil servant wage increases and negative terms of trade.

The current account gap has improved modestly but still relies on outsize foreign portfolio inflows, as bond ownership has not budged from 35 percent. Finance Minister Nene pushed asset sales at state-run power firm Eskom for an estimated $20 billion in funding needs, as Chinese banks chipped in $2 billion to support telecoms operator Transnet. Riots broke out against expatriate workers from African neighbors as President Zuma was preoccupied by multiple corruption investigations into his own and allies; conduct. The opposition Democratic Alliance strengthened its position with selection of a new party head breaking from the minority white tradition as the business community urgently pressed the ruling ANC for economic policy revisions.

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