FACTBOX-Key political risks to watch in Nigeria

LAGOS Tue May 3, 2011 10:49am BST

LAGOS May 3 (Reuters) - Nigerian President Goodluck Jonathan's choice of cabinet ministers and top officials will be key to the outlook for reform in Africa's most populous nation after elections which were deemed the most credible for decades.

Jonathan emerged from last month's polls with a strong mandate, having won 59 percent of the vote, but with a ruling party (PDP) chastened by a weaker parliamentary majority and the loss of several powerful state governorships.

Reaching out to his opponents -- particularly in the mostly Muslim north, where hundreds were killed in rioting after his victory -- will be vital if Jonathan, a southern Christian, is to galvanise support for reforms and govern strongly.

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Graphic on elections: link.reuters.com/xet78r

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Key pieces of legislation, including oil sector reforms and the creation of a sovereign wealth fund, are sitting before parliament and if they fail to pass before the current term finishes at the end of May, they could be delayed for months.

Government spending rose ahead of the elections, putting pressure on foreign reserves and weighing against efforts to drag inflation into single digits. [nLDE72S213]

The finance ministry and parliament are at odds over a 2011 budget which keeps spending at last year's record levels.

The banking sector is emerging from crisis, with state "bad bank" AMCON having soaked up all non-performing loans, but capital markets reforms could be slowed down if a less reform-minded government follows the elections. [nLDE72M0ZA]

NEW ADMINISTRATION

Jonathan is due to be sworn in on May 29 after his election victory last month and the process of selecting a new cabinet will only officially begin after the inauguration. [nLDE73R151]

But negotiations behind closed doors have already begun.

Jonathan's path to the presidency has not been an easy one and there is a list of regional and political factions who feel he owes them for his victory. Such debts have in the past crimped Nigerian leaders' ability to pursue their reform plans.

He had to convince powerful northern politicians in his own party to back him at the primaries and eschew a tacit agreement that power rotates between north and south every two terms, a deal which would have ruled out his candidacy.

The opposition Action Congress of Nigeria (ACN) made strong gains in the southwest, winning two state governorships from the ruling party and gaining parliamentary seats, and Jonathan will need their cooperation for legislation to pass smoothly.

His aides have said Jonathan will form an all-inclusive government.

Ex-military ruler Muhammadu Buhari, Jonathan's defeated main rival, has said electoral commission computers were rigged to sway the count against him in parts of the north and that the PDP vote was inflated in some of its strongholds.

His Congress for Progressive Change (CPC) party has said it has evidence and will go to court, potentially overshadowing the start of Jonathan's new term.

What to watch:

-- The formal process of selecting cabinet ministers will not begin until June, but some potential names may leak out.

-- Legal challenges to the election outcome.

POLICY AND REFORMS

The current parliament can still pass legislation before the end of May and has several key bills before it.

Arguably the biggest is the Petroleum Industry Bill, which will re-write Nigeria's decades-old relationship with foreign oil firms and redefine the fiscal and legal framework governing investment, including in its important offshore fields, expected to yield most of its future production growth. [nLDE71L1SW]

The government has vowed the bill will pass before the end of the current administration. Should it fail to do so, a new parliament could set the process back once again, particularly given the slimmer majority for the ruling party.

Investors in the planned privatisation of the power sector, one of the cornerstones of President Jonathan's campaign, are also unlikely to go beyond statements of interest until there is clarity over the make-up of the new administration. [nLDE70H1SX]

Government spending had been rising in the run-up to elections. Government borrowing had increased around 50 percent by late 2010, dwarfing private sector credit growth of just 3 percent in the year. [nLDE6AM1P0]

Foreign exchange reserves have started to stabilise but remain nearly a quarter below year-ago levels, although oil prices and production are rising.

Parliament approved a 4.972 trillion naira ($32 billion) budget in March, increasing planned spending by close to 20 percent from President Jonathan's initial proposal in December and taking it almost up to last year's record level.

Finance Minister Olusegun Aganga has called the plans "unimplementable" and pledged to talk with legislators.

There had been pressure on the naira currency NGN=D1 in the run-up to the elections, but the central bank has said it is determined to maintain exchange rate stability and has introduced forex forwards to try to smoothen demand.

What to watch:

-- Passage, or not, of oil reforms before end of May

-- Revision of the 2011 budget

NATIONAL SECURITY

Last month's elections may have been deemed by observers and many Nigerians as the most free and fair for decades but they also threw religious and ethnic rivalries into sharp relief.

Youths launched violent protests in northern cities after Jonathan, a Christian from the south, was declared winner, defeating Buhari, a northern Muslim.

Mosques, churches, homes and shops were burned and more than 500 people killed in three towns in the northern state of Kaduna alone. A curfew quickly brought the worst of the violence under control, but soldiers still patrol the streets.

A judicial committee is expected to conduct an inquiry into the violence, which the government has said was premeditated. Should Buhari or those close to him be found guilty of misconduct and punished, there could be further protests.

There were also several bomb attacks around the country in the run-up to the elections and security is likely to remain tight around Jonathan's inauguration at the end of May.

Some diplomats fear growing religious conservatism, hostility to Western values and pervasive poverty could allow radicals to gain a hold in the mostly Muslim north, and countering a growing sense of marginalisation in the region will be vital if Jonathan is to maintain security in the long term.

Jonathan is the first head of state from the Niger Delta, the restive heartland of Africa's biggest oil and gas industry, and his victory has been warmly received in the region.

But with many competing priorities, his administration will need to ensure an amnesty for former militants remains on track if they are not to return to attacks on oil installations.

What to watch:

-- Appointment of high-profile northerners to key posts to assuage fears of marginalisation

-- Any punitive action against Buhari or those around him which could trigger further unrest in the north

(For more Reuters Africa coverage and to have your say on the top issues, visit: af.reuters.com/ ) (Writing by Nick Tattersall; Editing by Giles Elgood)