• The electoral map is tilting towards Buhari in the swing regions of the southwest and middle belt, while high turnout in his core northern base will offset Jonathan’s advantage in the Niger Delta.

• While a Buhari administration’s reliance on technocratic, business-oriented senior officials will lead to constructive policy initiatives, we keep our long-term trajectory at neutral given the downside risks to oil production and policy implementation challenges.

 Buhari edges ahead

We had long viewed Goodluck Jonathan as a favorite to win reelection, but a number of factors now lead us to believe the edge has swung in Buhari’s favor. The election will still be difficult to call, but our expectation of a narrow Jonathan win was predicated on several factors that are losing some saliency late in the campaign.

Chief among them is the incumbency and financial advantages of the ruling Peoples Democratic Party (PDP). While this still helps Jonathan, its impact is blunted by the intensity of support for Buhari, lackluster grassroots campaigning by the PDP, and new anti-rigging measures by the electoral commission. New permanent voting cards and card readers will sharply reduce the level of rigging seen in 2011, when Jonathan beat Buhari in a landslide. Equally important are the enthusiasm gap between the candidates and widespread desire for change. Tepid support for Jonathan, even within his own party, means there is no guarantee that patronage will translate into votes. This is especially the case in the north where influential PDP governors and other leaders are taking the money but barely campaigning for Jonathan because of Buhari’s overwhelming popularity in the region.

While we expected the electoral map to favor Jonathan, current trends suggest that the swing regions may side with Buhari, including the Christian-majority and heavily populated southwest around Lagos. That could be the decisive demographic factor in the election. Jonathan won the southwest and middle belt handily in 2011, but faces an uphill task now. Buhari has reached out to the southwestern Yoruba community and brought them into the upper ranks of his campaign and potential administration, in a political alliance of the country’s two largest ethnic groups (the Hausa and Yoruba). In contrast, Jonathan has struggled to make inroads with either group.

The spotty polling data which is available is also trending in favor of Buhari. A recent poll by a credible local think tank, the Center for Public Policy Alternatives, showed a heavy 58-32% lead for Buhari in Lagos state—a state in which Jonathan handily defeated Buhari last election. While a national poll by Afrobarometer in January showed a statistical dead heat at 42% for each candidate, economic conditions with the weakening naira continue to deteriorate, along with the security environment. According to an IPSOS/Eurasia Group model for predicting elections, incumbents have a hard time winning reelection when their approval ratings are below 40%. We don’t have polling data to confirm where Jonathan is now, but given he was at around 50% at the end of last year, our best guess is that he is below 40% now.

In addition, the All Progressives Congress (APC) has suffered few defections during the campaign despite plenty of PDP inducements, suggesting a relatively united coalition whose members have confidence in the prospects of victory. In contrast, the PDP has been weakened by internal power struggles, including the dramatic departure from the party by former President Olusegun Obasanjo. Another obstacle for the PDP is the downturn in the economy, especially the naira devaluations that have hit pocketbooks hard in the import-dependent country. That has played into the APC’s rallying call for change at an inopportune time for the ruling party.

Despite some important military gains against Boko Haram in the northeast and a partial exoneration of its oil revenue management in a recent PWC audit, the PDP is starting to look desperate. Examples include: forcing the election delay, seeking (unofficially) the resignation of respected Independent Nigerian Electoral Commission (INEC) head Attahiru Jega, questioning Buhari’s health, playing sectarian politics, and casting doubts about the new permanent voter cards. This raises the possibility of another election delay, but we think that is relatively unlikely, in part because it would probably backfire politically and would certainly do so internationally. While some of his aides and military leaders may feel otherwise, Jonathan himself is unlikely to support such a maneuver.

Expect a contested election outcome

The above does suggest, however, that the administration will contest the election if it loses, especially if it is close. Whether that contestation is violent and protracted, or limited to a court challenge (which would likely uphold INEC’s election verdict) remains to be seen; it will likely be somewhere in between the two. Worst-case scenarios like a military seizure of Abuja or a self-declaration of victory by the PDP and de facto partition (like Cote d’Ivoire in 2011) cannot be discounted entirely but are unlikely. That’s in part due to the enthusiasm gap for Jonathan and also because of his own temperament. The concern, though, is if his administration is hijacked by hardliners in the PDP who will do whatever it takes to stay in power and forestall a dreaded Buhari presidency that they fear will prosecute them for corruption.

A look ahead at a possible Buhari presidency

Buhari is a radically different politician and leader than Jonathan, and his approach to security and corruption will be a sharp departure from the status quo, most likely for the better. When it comes to policies, however, there may be less divergence than meets the eye, especially in the economic realm. Many of Jonathan’s priorities—power and agriculture reform, local content regulations, and selective liberalization of the economy—will also be priorities under a Buhari administration, with differences of emphasis. Buhari may additionally look to liberalize the rail, refinery, and gas pipeline industries, none of which will be easy.

Even though a Buhari win may be the better outcome for investors over time, we are keeping our short-term trajectory (six months) at negative and long-term political outlook (two years) at neutral. In the near term, the post-election climate will be tense and likely contested regardless of who wins. But in contrast to Jonathan, a Buhari administration has a different mix of assets and liabilities. On the plus side, a Buhari administration would be stronger in tackling corruption, more reformist in the oil sector, and less likely to allow politics to swamp the business climate.

The reason we aren’t upgrading Nigeria’s outlook to positive, however, rests in the potential for an oil disruption and the likely pushback to Buhari’s policy agenda in a highly polarized political climate. His victory is likely to unleash a resurgence of militancy in the Niger Delta (Jonathan’s home region) that targets the oil sector. Former Delta militants have threatened to blow up oil pipelines, platforms, and personnel as in the past when they routinely took up to 500,000 barrels per day offline. There is likely some bluster in their threats. The former MEND movement barely exists, but it could be reconstituted. It is likely in the aftermath of a Buhari win that pro-Jonathan ex-militants disrupt oil production, potentially on a market-moving scale. The risk may not be sustained for long, as most of the former militants are more interested in collecting their amnesty payments, enriching themselves from oil bunkering, and tending to business interests in oil and security. Opportunists may see a chance, though, to gain leverage for future amnesty deals, especially as the current amnesty program rewards militants roughly in proportion to their rank and ruthlessness.

Second, even though fiscal management is likely to be constructive, there are still some uncertainties about the broad direction of his economic team. The austere 2015 budget proposal that now includes a low $52 oil benchmark (in the Senate version in consultation with the ministry of finance) is likely to be broadly compatible with Buhari’s own vision for fiscal policy in the near term. Despite some expansive welfare and public works pledges in his campaign manifesto, the oil price climate, together with Buhari’s top economic advisors, will dictate austerity at least in 2015. That’s also consistent with his track record when he was in office in the 1980s.

It is not clear, though, that Buhari has a strong economic policy orientation. This uncertainty is a chief risk for investors. Two different camps from inside his campaign will likely vie for control of economic (and other) policy. In short-hand, one camp is dominated by southwestern (Lagos and surrounding states) technocrats and businesspeople while the other is an old guard of northern aides and politicians with longstanding ties to Buhari. The policy gap between the two is vast, with the first group pro-business and pro-liberalization and the latter group more statist and nationalist in orientation. The signal from the campaign is that the southwestern group is ascendant when it comes to the economy while the northern group will get important posts outside of the economic realm, including national security. Such a division of labor would be positive for the investment climate, particularly since Buhari is known as a delegator outside of his core issues of national security and to a lesser extent, petroleum.

Buhari’s likely approach to tax policy and tax enforcement is instructive. His emphasis, at least at the outset, will not be on raising or lowering taxes but rather enforcing the current tax regime, which is widely ignored by companies and individuals alike. Using successful tax enforcement models from Lagos and elsewhere in the southwest, the administration would look to combine a zero tolerance approach (stiff penalties) with greater transparency in the collection effort to ”plug leakages.” Plugging leakages is a recurring mantra among Buhari’s economic advisors, who are convinced that tax/customs enforcement, revenue transparency, and tough anti-corruption measures will bring billions of dollars into the treasury without raising taxes or even including oil revenues in the equation. That may be a hopeful assessment in the current oil price climate, but there is conviction behind it from the economic team.

Having been the petroleum minister previously, Buhari is likely to take a more hands-on approach to the sector. He will push for reforms on multiple tracks—reform of the Nigerian National Petroleum Corporation (NNPC), reform of oil revenue transmission to the state (plugging leakages), and reform of the fiscal/regulatory climate for oil companies, perhaps in that order. Buhari’s platform calls for restructuring NNPC so that it is leaner and has less regulatory authority (and conflicts of interest) in the sector. This could allow for the commercialization of its upstream operations, allowing it to borrow on international markets to make its joint venture cash calls.

The process is likely to be slow, with some pushback from vested interests. That will be countered by the president’s discretion to appoint the petroleum minister, the head and board of NNPC, and many others in decision-making positions. While corruption will not magically disappear, there will be fewer sweat-heart deals for favored local companies or opaque oil swaps, and high profile prosecutions will set a tone of accountability that has been absent under the Jonathan administration. A Buhari administration would funnel oil revenues to the Central Bank through the Single Treasury Account rather than through dozens of banks as is currently the norm. The Petroleum Investment Bill (PIB) will again be reformulated and probably streamlined into a far less expansive reform package; fiscal terms will improve of necessity for IOCs. This will open up a window of opportunity for passage of a far narrower PIB, especially if the opposition APC gains a parliamentary majority. Failing that, a Buhari government would focus on unblocking the many oil and gas disputes with IOCs (blocked by vested interests) that are forestalling additional exploration and development.

I am currently in Nigeria on research and can be reached this week and next at (+1) 202.615.9482.