FACTBOX-Key political risks to watch in Nigeria

The bellow are the key political risks to watch in Nigeria this 2011. It is written by Nick Tattersall of Reuters and  Edited by Giles Elgood.

Jan 5 (Reuters) -

Nigerian President Goodluck Jonathan is waging a tough battle ahead of the presidential primaries in two weeks time, a contest whose outcome could shape the political and economic landscape for the next few years.

A wave of violence over Christmas and New Year, including a fatal bomb attack in the capital Abuja, will test the strength of Jonathan's resolve as his opponents look to exploit any sign of weakness ahead of the primaries. [ID:nLDE70101O]

The ruling People's Democratic Party (PDP), which has seen its candidate comfortably win every leadership contest since the end of military rule more than a decade ago, is divided over its nominee for the April polls.

Nigeria's political system, driven largely by patronage, has always favoured the incumbent. But Jonathan -- a southerner -- faces concerted opposition from factions in the north and his nomination is far from given.

The outcome of the elections could have far-reaching consequences, from security in the Niger Delta to the passage of legislation to overhaul the oil industry, as well as multi-billion dollar plans to privatise the power sector.

 A fight to the line could also mean back-room deals being struck, the sort of bargaining which has at times in the past involved the liberal use of public funds.

Public borrowing is growing rapidly and foreign reserves have been falling as spending is ramped up ahead of the polls, leading to concern about fiscal discipline. [ID:nLDE6AM1P0]

But the banking sector and capital markets remain relative bright spots, with reforms continuing apace despite the near-term political uncertainty. [ID:nLDE6BD0VO]

ELECTIONS

The electoral commission has set presidential elections for April 9, 2011, with parliamentary polls a week before and state governorship elections a week after.

In the immediate term, all eyes are on the PDP presidential primaries, which will be held on Jan. 13.

Jonathan's candidacy is controversial because of a ruling party pact that power should rotate every two terms between the largely Muslim north and mostly Christian south. [ID:nLDE66Q1EY]

Jonathan is a southerner who inherited the presidency this year after the death of Umaru Yar'Adua, a northerner who died part way through his first term. Jonathan's supporters say he was elected on a joint ticket and has the right to contest.

A group of influential northern politicians has picked former Vice President Atiku Abubakar as a "consensus candidate" to challenge Jonathan at the primaries, but it is unclear how wide his support base is nutside the clique that selected him.

Securing the backing of Nigeria's state governors, who form a powerful caucus in the ruling party, could be key to Jonathan's chances of success. Twenty of the 26 PDP governors said in December they would back him. [ID:nLDE6BF287]

But the PDP state governorship primaries are on Jan. 9, before the presidential primaries, weakening Jonathan's leverage. Holding the presidential primaries first would have meant the governors had more incentive to back him in order to secure their own victories.

Two states in the country's southwest -- Ekiti and Osun -- saw their PDP governors removed by the court challenges in late last year, eroding the ruling party's grip on the region around the commercial capital Lagos. [ID:nLDE6AP1AW]

Ask three Nigerians how the polls will end and the response is at least three equally well-argued scenarios. History has always favoured the incumbent but possible outcomes include:

-- The governors align behind either Jonathan or Abubakar, who wins the primaries and goes nn to take the election.

-- Jonathan wins the primaries by a narrow margin and the PDP remains divided. Northern factions in the PDP break away to challenge him in the election, a scenario which could favour opposition figures such as ex-military ruler Muhammadu Buhari.

-- The PDP resolves its divisions by picking neither Jonathan nor Abubakar, uniting instead behind a third candidate.

POLICY AND SPENDING

Government spending has 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. [ID:nLDE6AM1P0]

Foreign exchange reserves fell almost a quarter year-on-year by December. The excess crude account, into which Nigeria saves windfall oil income, has dropped to $300 million from $20 billion at the start of the presidential term in 2007.

Jonathan presented a 4.2 trillion naira ($28 bln) 2011 budget proposal to parliament in December, an 18 percent cut in approved spending for last year.

Recurrent spending remains high in the plans and supplementary budgets have been passed in the last two years to top up spending -- it is possible the same could happen again.

The political uncertainty also means major pieces of policy -- and the multi-billion dollar investment decisions that hinge on them -- are likely to be on hold until after the elections.

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 key offshore fields, expected to yield most of its future production growth.

Officials have said the bill will pass before the elections, but a Senate committee which has been reviewing it for the past year has only just finished work and lawyers advising the government have said that timeframe is unlikely. [ID:nLDE6AI0IM]

Failure to pass the bill ahead of the elections could mean it has to return to a first reading before a new parliament, potentially setting it back by months or years.

Until it passes, foreign oil firms will keep multi-billion dollar investments on hold. The projects have timeframes of several years, meaning lack of investment now could see Nigeria's oil output stagnate 5-8 years down the line.

Potential investors in the planned privatisation of the domestic power sector, one of the cornerstones of President Jonathan's policy, are also unlikely to go beyond statements of interest until the elections are over. [ID:nLDE69D0OX]

But banking reforms continue apace and the 5-year tenure of Central Bank Governor Lamido Sanusi means even a change in president is unlikely to derail them. Some analysts are worried about the inflationary impact of a new "bad bank" set up to absorb non-performing loans from lenders rescued last year.

What to watch:

-- Further depletion of foreign exchange reserves

-- Passage, or not, of oil reforms before elections

NATIONAL SECURITY

Bombs in the central city of Jos killed at least 80 on Christmas Eve, while four died in a similar attack in the capital Abuja a week later. Violence has flared up in the central and northeast of the country since the first blast.

Radical Islamist sect Boko Haram claimed responsibility for the Jos blasts but some officials have said the attacks were a politically led attempt 4o disrupt elections.

Mystery surrounds the ideltity of the Abuja bombers. Jonathan will want to quickly stem the flow of attacks or risk being undermined by opponents.

The military appears to have the upper hand in the Niger Delta, taking over a number of militant camps late last year and releasing 19 hostages in an operation carried out with the help of former militant leaders who accepted amnesty in 2009.

But the Movement for the Emancipation of the Niger Delta (MEND) has threatened more attacks, and associates of Henry Okah -- one of MEND's masterminds who is in detention in South Africa -- appear to have established links with new field commanders to replace those who took amnesty. [ID:nLDE6AJ01Z]

Oil infrastructure in the delta, a network of shallow creeks opening into the Gulf of Guinea, is exposed to attacks.

Fears of localised violence in the run-up to the elections have been heightened by weapons seizures last year.

The destination of the first, shipped from Iran, was unknown but some diplomatic sources have said it may have been meant to destabilise the country around elections. [ID:nLDE6AO1WT]

Nigeria is a generally peaceful nation but ethnic and religious rivalries bubble under the surface and could be exploited by politicians.

What to watch:

-- More bombs strikes on civilian areas

-- Further attacks in the Niger Delta

-- Ethnic or religious rhetoric during campaigning

(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)

For political risks to watch in other countries, please click on [ID:nEMEARISK]