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Impact of 2023 General Election on Nigerian Capital Market


Politics and economy are interconnected. In democracy, elected politicians govern and formulate the policies which drive socio-economic development.

The choices made by politicians are also influenced by economic imperatives and social factors. The influence of politics on the economy is so monumental that it touches the economic life of every person and business.

This is why investors should be concerned about the possible impact of the 2023 general election in Nigeria on their portfolios and the capital market.

Election is the basic foundation upon which democracy is built. It is a periodic ritual performed to strengthen the fabric of democracy. In advanced democracies, the build-up to elections is characterized by intellectual debates, sober reflections, manifesto presentations, political engagements and campaigns, all executed in carnival-like festivity.

The departure from this ideal during the 2020 US Presidential election, where brigandage took center stage, was an aberration. Regrettably, the fierce build-up to Nigerian elections has always evoked anxiety and fear in the minds of the electorate.

The elevated political risk that comes with this process is always a major worry for investors because markets do not like uncertainty, and general elections raise political uncertainties.

Right from the penultimate year to the election, the socio-political atmosphere becomes charged. Politicians resort to violent rhetoric and divisive tactics which deepens the country’s socio-political fault lines, in order to establish a competitive edge. During this period, the economy becomes overloaded with money arising from excessive election spendings which spikes inflation.

Governance is abandoned for politicking and economic decisions become driven by political expediences. All these dreaded happenings have become known as the penultimate year syndrome. As in previous penultimate years, the evolving political environment is expected to influence investors’ sentiments.

Awareness of the impact of election risk in the past can uncover recurring patterns which investors can learn from, in order to estimate how the next general election will affect their portfolios and hence, fashion out strategies to weather election cycles.

Since the end of the last military administration, Nigeria has conducted six (6) general elections. The transition to democracy started with the 1999 general election. Considering how General Babangida brazenly truncated the most credible election in Nigeria’s history in 1993, the 1999 general election conducted by the military was viewed with skepticism.

Based on fears of likely socio-political unrest, several investors exited equities between June 1998 and May 1999. In the penultimate election year, the equities market declined by 18% because of political uncertainty and due to weak economic fundamentals. In that period, crude oil price hovered around USD25 per barrel and external reserve was as low as USD4.9 billion.

Tension lessened when the two presidential candidates for the election emerged from the same region. Evidence, therefore, shows that the 1999 general election had a bearish impact on the capital market before inauguration in May 1999. After inauguration, there was a bullish surge which drove equities up by 25% in June 1999.

Uncertainties surrounding the 2003 general election were whittled down by a lesser fear for a civilian to civilian transition and the high expectations for re-election of the incumbent President Obasanjo.

Economic fundamentals had improved with crude oil price at USD30 per barrel, external reserve at USD7.5 billion and exchange rate at N140 / USD. Equities appreciated by 11% in the penultimate year and experienced a massive post election surge of 66% in 2003. Therefore, it can be concluded that election risk had minimal impact on the capital market in 2002 / 2003.

Although President Obasanjo’s devilish moves to succeed himself for third term in office heated the polity in 2006, political risk that attended the 2007 general election was immaterial. It was evident that democracy had come to stay.

The ruling party had repaired the damaged economy and was in pole position to victory. During that election period, the capital market was driven mainly by favourable economic developments which included high macroeconomic liquidity facilitated by increased foreign portfolio investment, margin lending and banking sector reforms. In 2007, the Naira appreciated by 17% to N122 / USD, boosted by strong foreign reserves of USD52 billion. In 2006, the equities market appreciated by 38%.

The upbeat continued in the 2007 election year with unimaginable growth of equities which appreciated by 75% making the Nigerian capital market the best performing in the world that year.

In spite of the politically motivated killings in Northern Nigeria after the untimely death of President Musa Yar’Adua in 2010, and the violent moves to retain the presidency in the North, heightened political risk had minimal impact on the capital market. Stern regulatory interventions in 2010 to rescue the financial system pushed equities up by 18.5%. However, the gain was lost in 2011 when equities declined by 16.3% due to the nationalization of three distressed banks and a hike in interest rate six times during the year. Therefore, economic factors impacted the capital market more in the 2011 general election.

Buildup to the 2015 general election was tumultuous. Internal rancour within the ruling party saw defection of political heavy weights to a newly formed mega party, APC. Terrorist attacks by Boko Haram also occurred with ferocious intensity and when added to woes of the failing economy, equities fell by 23.21% in 2014. It went further down by 17.36% in 2015 because the outcome of the presidential election was unexpected and depressing for investors.

From the second quarter of 2018, things started falling apart in the capital market. The build-up to the 2019 general election started impacting the market negatively. Freighted foreign and domestic investors exited the market which plunged it into a liquidity crisis and loss of 17.81% in 2018. The situation deteriorated further in 2019 as the presidential election was judged non-credible and fraudulent, thus sparking weak macroeconomic conditions and low investors’ confidence which made equities depreciate by 14.6%.

Nigeria is once more approaching another general election.

Historical antecedents indicate that on average, both equities and bonds show positive or negative performance in the penultimate year and immediately after election. While the drama of general elections can make your imagination run wild, what you need to watch out for is how the unfolding scenario will affect the economy, the capital market and your portfolio.

It may be helpful to stick to a long term strategy, which is longer than any election cycle, as returns in the capital market are made over a full business cycle, which may be longer than even one presidential term. For investors with low risk tolerance, the safety of bonds can douse their apprehensions

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