Has Nigeria's time finally come?

A busy road with a street market in Lagos: Nigeria has a bustling informal sector as well as increasingly confident oil and financial sectors

After a turbulent past two years, there is now a growing confidence in Nigeria, Africa's largest country by population and the world's sixth largest oil producer. Summing up the optimistic mood in the country, development expert Professor Jeffrey Sachs states "this is Nigeria's decade", while Goldman Sachs chief economist Jim O'Neil says: "If [Nigeria] shows the same increase in its growth-environment score over the next decade, many investors will look back and say: 'Why the hell didn't I invest in Nigeria?'"

But sceptics would say that this optimism has been expressed before and proved to be a false dawn. So what is so different today to make Olusegun Aganga, the country's new minister of finance, declare at a recent investment conference in London that there is "a new investment climate in Nigeria"?

Mr Aganga, formerly managing director of Goldman Sachs International in London, was keen to emphasise not only the significant changes taking place in the country at present under president Goodluck Jonathan, including major reforms in the banking and power sectors, but also Nigeria's current strong economic performance, which is performing strongly in growth terms.

He says: "Compared with the average negative GDP [gross domestic product] growth of -0.8% globally, 0.2% for advanced economies, 2.1% for emerging countries and 5.6% for India, Nigeria is performing relatively well, but there is room for improvement. [Nigeria's] real GDP growth was extremely strong in the first half of 2010, growing by 7.4%, versus 5.9% during the same period in 2009. This enhanced growth performance arose from sustained growth in the non-oil sector and an improvement in oil production, resulting from the stability in the Niger Delta due to the successful implementation of the amnesty programme by this administration. Real oil GDP grew by 3.2%, versus -3% during the first half of 2009."

Mr Aganga says a target overall growth rate of 10% is feasible but he is under no illusions. Despite large oil and gas reserves, an expanding middle class, an increasing demand for consumer goods and the return of peace in the Niger Delta, he notes that the country has an "infrastructure deficit" of $100bn and much needs to be done to improve the flow of electricity and the quality of infrastructure after years of non-investment.

The stalled expansion of Nigeria's grid capacity over the past two decades has crippled the growth of the country's manufacturing and commercial industries. But with the 'Power Roadmap' announced in August and the close involvement of Mr Jonathan in its implementation as his pet project, there is clear progress in making sure that goals on improving access to power are achieved.

For Mr Aganga and other officials, the economy can only grow if the power sector is significantly restructured, but there are also other key components of the new investment climate taking shape. Obviously, political stability is a key factor going forward, as is stability in both the banking and capital markets, and there are positive developments in all these key areas.

A stable future

Although the spectre of corruption hangs over the country, Nigeria has had a stable democracy since 1999 and the current administration has stated its determination to hold free and fair elections in January 2011. Mr Jonathan has announced his intention to run for the presidency and the election is expected to showcase Nigeria's growing political maturity. Although the elections are likely to cause some uncertainty, as they do in all countries, the elections are not expected to unsettle the current economic course or change the positive growth outlook.

A strong financial sector will be critical for Nigeria to achieve its growth potential. Over the past year, the Central Bank of Nigeria, under its governor Lamido Sanusi, has implemented a series of wide-ranging reforms that have helped stabilise the banking sector following both the 2009 domestic banking crisis after the slump in the Nigerian Stock Exchange (NSE) and the 2008 global financial crisis. The CBN's N600bn ($3.9bn) bailout of the banks has been followed by various other measures to clean up the sector and stimulate lending to the wider economy. In 2010, following the CBN's special audit of banks in late 2009, those that passed the audit are beginning to show increased lending and a return to profitability.

But despite this progress, Nigeria still has a long way to go in banking terms. This can also be seen as a mark of its potential. Arunma Oteh, director-general of Nigeria's Securities & Exchange Commission (SEC), noted at the recent London investment conference that sub-Saharan Africa accounts for only 1% of total global banking assets and Nigeria accounts for 15% of that 1%. She added that Nigeria had only 20 million bank accounts as opposed to 60 million mobile phone subscribers. While bankers suggest that only 10% of the population has a bank account (or 15 million people out of a population of 150 million), these low figures indicate the enormous opportunities available if banks can tap into this huge unbanked market.

The government is trying to stimulate growth in many areas, especially in improving the capital markets and investment environment. Since the NSE lost 45% of its value in 2008, leading to the domestic banking crisis, there have been considerable efforts to improve corporate governance and oversight.

Goodluck Jonathan, Nigeria's president

Discipline for brokers

The SEC has also been keen to instil discipline in the brokerage community by revoking brokers' licences. Ms Oteh said in September that "out of 330 stock-broking firms operating in the market, close to 100 are not really active and we discovered that they have not been filing their returns to the commission". Keen to restore investors' confidence, she adds: "The SEC would not tolerate illegal practices in the market; any operator that fails to adhere to the rules would be shown the way out."

The market reforms are important but the NSE is still relatively small and, while there is a lot of talk of privatisation and new deals, there is considerable room for expansion. At present, the total equity market capitalisation of the NSE is about $38bn and it has 214 listed companies, compared with South Africa's capitalisation of $370bn.

Nigeria's government is determined to improve the financing of economic growth not only by increasing the funding of small and medium-sized enterprises (SMEs) through central bank guarantees (as listed in the banking reform article), but also through improved pricing structures.

Mr Aganga announced in London that Nigeria would launch a $500m debut Eurobond in October or November to help create a pricing structure for corporate borrowers. "We want to set a benchmark price and make it easier for corporates to borrow," he said. This year, corporate borrowing rates have declined significantly and the government wants corporates to have more confidence in rates. The minister believes that there is plenty of appetite for the $500m bond, with no shortage of investors.

Developing the capital markets is a key government objective, as Mr Sanusi said earlier in the year. He says: "A diverse capital market is a necessary step to becoming a financially developed economy. Improving capital market depth and accessibility by promoting alternative forms of raising finance for priority sectors is therefore very much on our agenda. This can be achieved through developing an infrastructure for a corporate bond market, more accessible equity markets, supporting deeper venture capital and microfinancing of new businesses, and establishing a sustainable private equity environment, potentially with government seed capital."

Solid performance

Looking at Nigeria's key domestic macroeconomic and financial developments, the solid first-half growth performance of 7.4% is certainly creditable but needs to be viewed alongside other key factors, including the latest record government budget, the country's debt structure and its level of foreign reserves.

According to the CBN's Monetary Policy Committee (MPC) meeting on July 5, the country's GDP growth for 2010 is projected at 7.74%, which is higher than the revised figure of 6.66% recorded in 2009. The non-oil sector is expected to remain the main driver of overall growth, with agriculture contributing 2.49%, wholesale and retail trade 2.03%, and services 2.11%.

Meanwhile, the MPC meeting noted that year-on-year inflation declined to 11% in May 2010 from 12.5% in April and 11.8% in March. Similarly, core inflation fell to 8.8% in May from 9.8% in April and 9.5% in March. While the downward trend looks promising, economists warn that unknown risks are added by various factors, such as the creation of the Asset Management Company of Nigeria, tasked with purchasing up to $10bn of non-performing loans from the banking sector, and the 2010 government budget, which is set to increase spending by almost 50%.

Spending rise

Under the 2010 budget, government spending has risen massively, according to a Standard Chartered report, to N4608bn, with a third of the planned budget on capital expenditure in areas such as infrastructure, the power sector and development projects in the Niger Delta. With total government revenue projected at N3086bn, based on a bullish assumption of a benchmark oil price of $67 a barrel and an oil output assumption of 2.35 million barrels per day, a deficit of N1520bn, or between 5% and 6% of GDP, is forecast.

The budget deficit is expected to be financed, according to Razia Khan of Standard Chartered, by N897bn of domestic borrowing, a N132bn planned oil-licensing round and the N75bn debut Eurobond, plus sales of state-owned assets. With tight assumptions, there appears to be little room for error in the budget.

But, unlike many countries, Nigeria's debt structure is relatively modest and not overly problematic, and its foreign reserves are quite healthy. As of early September 2010, Nigeria's gross external reserves stood at $37bn, which is seen as adequate, financing 16 months of imports, well above the accepted international benchmark of three months' import cover.

Taking all the variables together, Nigeria has a lot of factors in its favour. The reformed banking sector is heading in the right direction, investors are beginning to see the opportunities in this huge market, and Mr Jonathan's government is beginning to address key issues such as power, for which investment is long overdue.

Unfortunately, however, it is still early days, the banking reforms are just taking hold and there are elections in January that could be divisive and create uncertainties. Having said that, there is a good deal of optimism that this time Nigeria's moment has come. As Lord Malloch-Brown, former deputy secretary-general of the UN and chairman of the recent investment conference in London, said of the delicate political outlook: "If Brazil was finally able to realise its promise, why not Nigeria?"

Nigeria's power promise

"Only 40% of people in Nigeria have access to electricity," says Professor Bart Nnaji, special adviser to Nigeria's president and chairman of the Presidential Task Force on Power. "For 15 years we did not invest in the power industry. It has stifled the creation of the jobs that are urgently needed in a country with a large and rapidly growing population; and the erratic and unpredictable nature of electricity supply has engendered a deep and bitter sense of frustration that is felt across the country and in its urban centres in particular."

Explaining his vision for the sector to an investment conference in London in September, and highlighting the Power Roadmap launched for Nigeria the previous month, Mr Nnaji said: "The federal government has stressed the need to return to the task of pursuing the fundamental changes to the ownership, control and regulation of the sector that were outlined in the National Electric Power Policy (2002) and enshrined in the Electric Power Sector Reform Act of 2005."

A government statement regarding the roadmap says: "To meet our Vision 20-2020 target of 40,000 megawatts will require investment in power generating capacity alone of at least $3.5bn per annum for the next 10 years. Correspondingly large investments will also have to be made in other parts of the supply chain (the fuel-to-power infrastructure and the power transmission and distribution networks). These sums cannot and will not be funded and directed by the federal government. Rather, central to the development of the sector will be the need to incentivise the private sector to partner with the government in this endeavour."

The key to success is the inflow of private sector investment through the creation of new power generation and distribution entities and the development of a competitive electricity market. Over the coming year, according to the roadmap, the government will fast-track these reforms of the power sector by: removing obstacles to private sector investment; clarifying the government's strategy on the divestiture of the Power Holding Company of Nigeria successor companies; and reforming the fuel-to-power sector.

The strategy is to maintain the current allocation of power for every part of the country; then, when additional supplies come from new power programmes, a significant portion of these will be allocated to key industrial cities. It is expected that 14,000 megawatts of power will be available across Nigeria by December 2013 - more than three times today's capacity.

Will the Power Roadmap goals be met? The scheme has just been launched, the government is acutely aware of its importance and Nigeria's growth potential is closely linked to its success. With strong political support for the roadmap, there is a sense that it will not be allowed to fail.