2014: A Look Ahead Nigeria and Brazil
February 25, 2014
The start of the year is a natural time to take stock, and to prepare for the challenges and opportunities in the year ahead. Of course, it is also a time for the pundits to issue confident predictions about what is going to happen next.
I find this a mug’s game. Understanding the forces that shape current political events and their impact on the business and economic environment is difficult enough. And it is usually of more value to investors if you can give them a meaningful understanding of the pressures that are making certain stakeholders act in certain ways.
In the absence of a crystal ball, it is, however, possible to provide scenario planning for the future, in order to see how a business or a portfolio might respond to external shocks or stresses. But the world I see, through the prism of the markets I know best in Latin American, Africa and elsewhere, is becoming increasingly complex, and the impact of events diffuses in unforeseen ways. Right now, Syria would be the epitome of that, but across the Arab world the results of the popular uprisings that gathered pace almost exactly three years ago continue to play out in ways that few could have expected back then.
Two of the largest markets I cover, Nigeria and Brazil, will be gearing up for elections this year. The distraction of the World Cup in Brazil should not disguise the growth challenges that the country faces. However, the election is still Dilma Rousseff’s to lose. The policy focus, such as it is, will be on healthcare and education. That does not bode well for management of the current account, nor for the business environment: long-overdue but politically sensitive reform of labor and tax regulations to improve competitiveness is unlikely to happen anytime soon. Calls for Economy Minister Mantega to go have begun early this year, but he has, until now, been a loyal and useful tool through which President Rousseff has been able to deflect criticism. Make no mistake, she calls the shots in the formulation of Brazilian economic policy. Her personal interest in infrastructure, based on the country’s enormous needs, should be where investors focus their energies.
Incidentally, I would stay long on Brazil’s neighbor Argentina, on the basis that the current political scenario can only improve after elections in 2015, and the world will continue to need what the country has to offer – competitively priced agricultural products.
Nigeria does not hold a presidential election until 2015, but in a much more charged environment. The unofficial positioning of potential candidates is already in full swing. The presidency of Goodluck Jonathan is looking increasingly isolated, and control of key ministries, namely oil, may not compensate for the feeling, even within the ruling party, that change is due. Grandees of Nigerian politics, such as former President Olusegun Obasanjo, have publicly called for the current incumbent not to seek a second term, and northern politicians feel this is their time. In addition, a newly unified opposition offers Nigerian voters something of a choice, for the first time since the return to democracy in 1999. The country has enjoyed sustained growth, and the Central Bank has done a lot for macroeconomic stability. However, management of the oil industry remains a mess, and the insurgency in the north should not be underestimated.
Mad for MINTS
The newly minted MINT grouping, of which Nigeria is a member (along with Mexico, Indonesia and Turkey) will gain traction this year as another neat emerging market pigeonhole. In some senses, these four countries form a more homogeneous grouping than the disparate markets of the BRICS. For example, they all share participatory democracies, with young populations that will all get richer over the next 30 years. However, each one has its own divisions, which when combined with weak institutionality and corruption tend to present particular market entry challenges.
Finally, we should also look inward, at ourselves as investors and capitalists. What kind of opportunities are we searching for? Are we interested in emerging markets for the prospect of some quick returns, or are we motivated more by longer-term considerations? With whom are we prepared to do business, and how do we want to engage with them? This will affect the risk matrix we are prepared to take on, and where, ultimately, we direct capital.
James Knight is a consultant with ten years’ experience working in and with emerging market countries. He is Director of Pionero Partners, a U.K.-based risk and strategic advisory consultancy serving international clients. Prior to his current role he advised a Hong Kong-based fund on various LatAm projects, and previously worked at Barclays Bank plc. He has also handled targeted communications projects for the World Bank and the United Nations. He began his career as a journalist, freelancing for Reuters, The Economist, The Sunday Times, and Africa Confidential covering business, investment and conflict. He holds a degree from Cambridge University.