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Asia-PacificApril 6 2008

Nigeria ready to blossom

Over the past decade, the word ‘potential’ has become synonymous with Nigeria, as the resource-rich nation’s progress has been stymied by political and economic instability. Much progress has been made on both fronts, and under new president Umaru Yar’Adua Nigeria looks set to deliver on its promise. Charlie Corbett reports.
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In October 2007, Patricia Ettah, the speaker at Nigeria’s House of Representatives, was forced to step down. Her resignation followed revelations that she had spent millions of naira refurbishing her official residences and buying cars.

The incident was seen at the time as an embarrassment for president Umaru Yar’Adua, who has sworn to fight corruption in Nigeria at every level. According to OB Sisay, analyst and deputy head of the Africa division at political risk specialist Exclusive Analysis, in previous times this case would not even have been discussed by parliament. Mr Sisay believes Ms Ettah’s forced resignation is proof of a psychological shift that has taken place in Nigeria: “There is a growing sense within the Nigerian leadership, and also within the population, that democracy, reform and fiscal probity are desirable. There seems to be a lot less tolerance for the sort of carte blanche corruption that existed before.”

Perceptions of Nigeria are shifting as political stability becomes assured, the economy grows and its banking sector matures. Mr Yar’Adua has cemented his position as head of state by defeating a petition by opposition leaders to have his election declared null and void. The country’s foreign reserves have topped $55bn and the price of oil, Nigeria’s biggest export, was above $100 per barrel at the time of writing. Add to this mix a forecast gross domestic product growth of 9% for 2008 and a debt free external balance sheet, and then Nigeria’s prospects increase further.

A stable political and economic background meant the capital markets took off in Nigeria in 2007. Most local banks tapped into the market last year, both at home and abroad. Alexander von Sponeck, head of CEEMEA debt capital markets at Merrill Lynch, says: “Investors are taking advantage of a desire to get access to short-term local currency naira risk, because local currency has been appreciating and people like the naira story with the backdrop on oil, the banking sector and the real estate market.”

Many feel that deal volumes in 2008 will not come anywhere near to matching those of last year. Emeka Emuwa, chief executive of Citi-owned Nigeria International Bank, believes the banks have raised pretty much all the capital they intend to raise. He says: “There are still a few issues in the pipeline, but beyond that I don’t see the same spate of issues that there were over the past two years. The objective now is to apply that capital... and deliver the kind of return that shareholders expect.”

Infrastructure opportunities

In terms of investment opportunities within Nigeria for domestic banks, the potential is great. The nation’s infrastructure needs are phenomenal and the increased scale of most banks also means that for the first time they have the requisite scale to participate in the booming oil and gas industry.

The government’s drive to assist Nigeria’s private sector in improving the nation’s infrastructure will also help. Public-private partnerships (PPPs) will be a key element towards achieving this goal. However, there are constraints. One investment specialist says: “Project financing is a high-skill area and totally alien to most of the Nigerian banking sector. It is also something that requires a strong regulatory framework, particularly if you are talking about PPPs.”

The debacle over the federal government’s 2006 sale of Nigerian Telecom to Transnational Corporation of Nigeria (Transcorp) was one example of the difficulties inherent in home-grown PPP arrangements. After little more than one year of ownership, Transcorp was forced to divest its stake by the federal government for failing to perform.

In terms of critical infrastructure, the federal government has a mountain to climb. According to a recent report by a British parliamentary fact-finding group, which toured the country in November, chronic power shortages meant that the country was operating at just 23% of its manufacturing capacity. Nigeria’s power shortage is the single largest hindrance to economic growth that the nation faces. It permeates every aspect of Nigerian society, blackouts are a feature of everyday life.

The power shortage is ironic when one considers that Nigeria is the 11th biggest exporter of oil in the world, the biggest in Africa, and if it harnesses its gas supplies it could provide enormous amounts of energy. As it stands, however, Nigeria’s power industry is producing less than 4000 megawatts (MW) of electricity – in a country that needs up to 25,000MW.

Although MrYar’Adua has ambitious plans to boost capacity to 6000MW within 18 months, history suggests that this will be difficult to put into practice. Mr Yar’Adua’s predecessor, Olusegun Obasanjo, spent an estimated $10bn on power between 2000 and 2007 with little effect. The nickname for Nigeria’s former national power utility, the National Electric Power Authority, used to be ‘Never Expect Power Always’. The name of that entity might have changed to the Power Holding Company of Nigeria, but the government will have to work to alter its reputation.

Enter the dragon

The influence of China on Nigeria’s future cannot be underestimated. According to the latest figures from the Nigerian Business Information Council, Chinese investment in Nigeria totals more than $10bn. Garba A Zakari, minister of trade at the Nigerian High Commission in London, says: “China is growing even bigger here now. It is getting involved in railway development and oil exploration. A few years back, the highest investment was just a billion [dollars]... China has long-term investment proposals and initiatives in Nigeria.”

Proof, if it were needed, of China’s commitment to investing in Nigeria came last year when China Development Bank (CDB) announced that it had entered into a partnership with Lagos-based United Bank for Africa (UBA). The deal, which could involve a CDB investment of up to $5bn in UBA, will expand the Chinese bank’s ability to finance infrastructure projects in Africa.

As The Banker was going to press, China’s largest commercial bank, Industrial and Commercial Bank of China (ICBC), had agreed a deal with Nigeria’s Oceanic Bank to partner it in export and trade finance. The announcement came just months after ICBC completed its purchase of 20% of South Africa’s Standard Bank for $5.56bn. Chinese interest in Nigeria is unlikely to go away. Its underdeveloped mineral wealth and huge oil-generating capacity are of major importance to the Chinese economy, which is ravenous for commodities.

Long-term strategy

Chinese investment will go a long way in enhancing the progress that Nigeria’s banking sector has already made in transforming itself. However, the banks must be careful not to get carried away. Although opportunities lie in infrastructure investment, as well as in oil and gas, it is a long-term strategy and shareholders will demand returns in the short term.

With a booming Nigerian Stock Exchange (NSE), that returned more than 70% to investors in 2007, there is a temptation for some banks to boost profits by margin trading on the back of positive sentiment. This could lead to a bubble. According to some estimates, as many as 8.6 million people in Nigeria hold some bank equity but they have very few other assets that they can invest in. One Lagos-based investor says that the level of equity market interest could outstrip the ability of the broader economy to grow at the same speed: “Investing in property is difficult and there are a lot of restrictions to investing in small business. Yields on government securities have been compressed over the past two to three years, so if you want serious inflation-adjusted returns, the equity market is your only option,” he says. “The NSE has the potential to become something of an asset price bubble if alternative assets and deeper real economy investment doesn’t grow quickly to absorb more of the liquidity that will come into the system.”

As to the future, Nigeria, in many ways, resembles a blank canvass. It has huge resources, both physically and financially, it is just a matter of putting them to effective use. Merrill Lynch’s Alexander von Sponeck says: “They have the brains, the people, the energy and the entrepreneurial spirit. They have everything, but it is just spending money on getting the technology and the basic infrastructure right that will make Nigeria blossom.”

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