Nigeria – Africa’s next great hope


It’s not hard to see why Nigeria is Africa’s hottest story – with growth expected to reach 8% a year over the next two decades, this is a market that cannot be ignored.

In April Muhammadu Buhari unseated Goodluck Jonathan as president, the first time Nigeria has voted a sitting president out of office. Buhari’s electioneering mantra of clean government and war on waste and corruption comes with high expectations. In June he sacked the high command of the military for its failure to rein in Boko Haram, and set his investigators on key officials in the previous government suspected of corruption.

These are crucial confidence building steps for a country steeped in a culture of graft. Nigeria’s economy has grown at about 7% for the past decade, slipping to 6.3% last year. According to a report by Africa Economic Outlook, the non-oil sector has been the main driver of growth, with services contributing about 57%, while manufacturing and agriculture contributed about 9% and 21% each. This diversification has cushioned it against the shock of lower oil prices.

The 2015 outlook is for moderate growth of 5%, due to lower oil prices and a weak global economy, according to the International Monetary Fund. This should be a temporary dip, as growth is expected to return to 7%-8% a year over the coming decade. That, and a middle class of 40m people – many times the size of SA’s – is what makes Nigeria ?so compelling.

Contrast this with SA’s flaccid economic growth of 1.5% last year, with worse to come: there is a very real possibility SA will be in recession within the next year. Nigeria’s foreign direct investment (FDI) hit a record $7.1bn (R92bn) in 2012 and has overtaken SA as the preferred destination for investment funds in Africa.

While SA’s growth prospects have all but evaporated, Nigeria is just getting started, which explains why more than 100 SA companies decided to brave the clogged and chaotic streets of Lagos and Abuja for a piece of the action. It’s not just the familiar South African brands such as Shoprite, MultiChoice and MTN that have seen where their futures lie, but construction and engineering companies such as Group Five and Murray & Roberts, as well as SA law and accounting firms.

The change in government has strengthened the case for investment in Nigeria. For one thing, doing business is likely to become easier, according to Dianna Games, CEO of Africa @ Work. “If the president succeeds in tackling corruption – and there is every indication that he will certainly make serious inroads into it over time – that will already be a major win in terms of the business climate. Tackling graft will lower the cost of doing business as it will help to address longstanding dysfunction in state enterprises and help to level the playing field.”

In a report published earlier this year, the Institute for Security Studies (ISS) says Nigeria is the African country most likely to play a global role, due in part to its large population of 170m, which is expected to grow to 320m by 2040, and an economy that is expected to top $4.2tr (R54tr) within 25 years. It is also stepping up its investment in security to combat Boko Haram, which will help it play a wider peacekeeping role in Africa.

One of Buhari’s first actions as president was to approach the World Bank for a $2.1bn (R27bn) loan to help rebuild parts of the underdeveloped north of the country, where Boko Haram’s roots run deep. Though clearly committed to military action, Buhari sees no hope of deracinating Boko Haram without the gentle persuasion of investment and social repair.

Buhari’s other priorities are to root out corruption and spread wealth to the country’s poor. Between a third and 42% of Nigerians live on less than $1.75 (R22) a day. To solve this, he needs to get investors on board.

One of the great ironies of Nigeria, Africa’s largest oil producer, is that it is forced to import 70% of its fuel needs, hence fuel shortages are common. Electricity supply is erratic and a major constraint on growth, which is what prompted the previous government to launch a programme of privatisation. The Power Holding Company of Nigeria was split into regional distribution and generating companies and sold off to private investors, though it will take the best part of a decade and $5bn (R64bn) in investment a year to restore the grid to respectability.

Another brake on growth is Nigeria’s spotty infrastructure. Like in SA, ports and roads suffer from decades of neglect. Buhari promises to redress the criminal neglect of infrastructure, and to recover billions of dollars looted by government officials. How he achieves this remains to be seen, but this will not go far in funding the country’s daunting infrastructure backlog. For that he needs foreign financing and a convincing investment story.

Though nominally committed to privatisation since 1999 when it passed the Privatisation and Commercialisation Act, Nigeria’s Bureau for Public Enterprises has admitted that barely 10% of roughly 400 privatised firms are functioning properly. Reasons cited include improper valuations, asset stripping by the acquiring investors, lack of technical know-how and general incompetence. Privatisation was intended to counter the disastrous indigenisation decree of 1973 that effectively passed control of international corporations to the state, resulting in a proliferation of atrophied state monopolies in virtually every sector of the economy.

Hurt by oil price drop

The drop in oil prices over the past year has hurt Nigeria. Earlier this year the central bank of Nigeria introduced import restrictions to stem the flow of US dollars out of the country. This has created artificial support for the naira, but has created problems of a different kind: importers are unable to access hard currency to pay for goods, and a vibrant black market in US dollars has flowered. While other oil producing countries have seen their currencies slide against the dollar, the official naira/dollar exchange rate remains stubbornly high. It is only a matter of time before this dam bursts and the currency goes the way of the Russian ruble and the Colombian peso.

Gareth Brickman, Africa analyst with ETM Analytics, told Finweek he expects a 10% softening in the naira by year-end, but despite the challenges, Nigeria is still a promising market. “I think the biggest issue in Nigeria is the tough operating environment. On top of issues with currency and corruption, infrastructure is very underdeveloped and like SA they are suffering from electricity constraints. I believe several SA companies, notably retailers, have been bitten hard by the costs of trying to operate with these hurdles and pulled out.

This is an excerpt of an article that originally appeared in the 8 October 2015 edition of Finweek. Buy and download the magazine here.

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