Nigerians are the happiest people in the world. Or at least that was the view of social science researcher World Values in its 2008 survey of global happiness. It cited humour, openness and can-do spirit as attributes that kept the populace of Africa's second biggest economy cheerful. Nigerians will need all three attributes in abundance if they are to top the happiness league again for 2009.
In the past 12 months, Nigeria's economy has been severely undermined by a tumbling stock market and collapsing oil prices. As the credit crisis in developed countries began to take hold, risk-averse foreign investors fled the Nigerian market, causing panic on the exchange and leading to a selling frenzy that eventually wiped N8000bn ($53.7m) off the value of stocks.
At the same time, the price of oil, which makes up 95% of Nigeria's export earnings, fell off a cliff. It dropped from its mid-2008 highs of almost $150 per barrel to about $40 as The Banker went to press. The global economic crisis has shaken the country's ruling elite and a planned $500m sovereign bond was shelved in March by finance minister Mansur Muhtar, who cited weakness in the international financial markets and potentially prohibitive interest rates.
Serious challenges
In announcing his long overdue budget in mid-March, president Umaru Yar'Adua conceded the economy faced "serious challenges" in 2008 and that spending would need to increase by 17% on the year before. The country's supply of foreign currency reserves fell from $52.8bn in December to about $48bn in March, with the government under increasing pressure to spend more, as revenues drop and the price of imports increases. The government has estimated that the budget deficit is likely to reach just over 3% of gross domestic product (GDP) for 2009, compared to 2.1% last year.
Nigeria's weakening macroeconomic position led to a collapse in the currency in November when the naira fell by 20% against the dollar. The governor of the Central Bank of Nigeria (CBN), Chukwuma Soludo, previously praised for his reforming zeal in the bank sector, has come under strong criticism. His decision in November to allow the currency to depreciate and implement strict currency controls in order to protect foreign reserves was met with dismay from some quarters of the country's banking industry. The inter-bank market in foreign exchange was effectively shut down, leaving banks bereft of a formerly lucrative source of income.
CBN Support
Most bankers in Nigeria, however, are broadly supportive of the CBN's policy, just so long as the currency controls are temporary. "Policy makers have to decide what the best set of tools is to manage a difficult and unprecedented situation," says Ladi Balogun, managing director of First City Monument Bank in Lagos. "Only in hindsight can you tell if those are the right policies. The requirements of the real economy must be placed ahead of the financial markets."
It is all a far cry from the heady days of early 2008 when Nigeria was basking in the afterglow of consistently high oil prices and a hugely profitable and stable post-reform bank sector. Nigeria's banks, once the standard bearers of the country's burgeoning middle class, now stand on considerably shakier ground. Many are heavily exposed to bad loans through margin lending to financial speculators that were crippled when the Nigerian Stock Exchange fell by 60% in a matter of months last year. As a result, the CBN estimates the bank sector as a whole could be exposed to almost N1000bn of bad debts. This has led some financial analysts to call for a state-backed bank bail out to save the sector from collapse. Most, however, believe this policy to be unnecessary. Capital adequacy ratios in the sector average more than 20% and, even when the losses through bad loans are taken into account, analysts from investment bank Renaissance Capital believe that figure would only drop to a sturdy 15%. But that is not to say there won't be casualties.
"If I told you I knew there wouldn't be any insolvency, I would be lying," says Victor Osadolor, group chief financial officer at UBA. "Every bank is taking different actions and some might be more prudent than others. When you have illiquidity on a consistent basis, insolvencies happen because people become desperate." He adds, however, that the CBN has responded well to the situation. "I really think that you will not have a bank failure in Nigeria because the CBN knows the consequences. It is contagious and will remove trust from the whole system."
Power problems
Aside from the bank sector's issues, Nigeria faces the perennial problem of power generation. Despite numerous pledges from the government of President Yar'Adua, little has been achieved to provide Nigeria with a consistent supply of electricity. Blackouts remain commonplace and most private companies are still forced to spend large sums of money providing their own power through costly diesel generators.
In early March, the president took the drastic step of removing three top executives at the state-run Power Holding Company of Nigeria after years of failure. It is all part of the government's pledge to boost Nigeria's power supply from a meagre 3000 megawatts, as it stands today, to 6000 megawatts by the end of 2009. Few in Lagos are optimistic this target will be met. "I've heard that story before. Even if they had the money and started now, it wouldn't be ready by the end of the year," one Lagos resident tells The Banker.
The solution is the private sector, according to Tayo Aderinokun, managing director of Guaranty Trust Bank in Lagos. "It's not rocket science. Let every state take care of its electricity. Leave them free to charge whatever rate is economical for them to make a profit. The same as what happened with the telecoms industry," he says. "Having one head of electricity generation for the whole country sitting in Abuja is not going to work. Decentralise the whole thing."
Most agree that Nigeria's chronic mismanagement of its power sector is the single biggest constraint on economic progress. "Without power we can make no more progress in Nigeria. Small and medium-sized enterprises are groaning from a lack of power," says Mr Osadolor. "We need companies that are focused on profit and competition. Once power is fixed in this country, the small and medium-sized enterprises will come out and truly show what they are capable of."
Weather the storm
Despite the mounting challenges that Nigeria's economy will face in 2009, the country is well placed to weather the storm. Most agree the government is handling the economic crisis with a steady hand, and there have been no defaults in the bank sector or widespread insolvencies. During the country's last big recession in the early 1980s, loose monetary and fiscal policy eventually led to a military coup. This time the country has a well capitalised bank sector and a stable civilian government. Although GDP growth is likely to fall considerably from last year's 6.4%, most analysts agree that the economy will still grow by a healthy 3% to 4% in 2009.
The problems caused by a plunging oil price have tended to mask the fact that the oil sector's growth has been dwarfed in recent years by the growth of other sectors. Agriculture, telecoms and services all outpaced oil growth last year and are likely to continue to do so in 2009. A visit by George Soros's $20bn hedge fund in March, looking for opportunities, emphasises how far Nigeria has come. Esili Eigbe, an equity research analyst for Renaissance Capital in Lagos, believes that, even now, it is a good time to invest in Nigerian stocks. "Nigeria is one of the cheapest places in the world you can find equities. It's no wonder Mr Soros came in," he says. "We've seen a lot more interest [from investors] looking to buy up assets that have been greatly devalued since the beginning of last year."
Despite the government's many failings in tackling Nigeria's age-old problems of corruption, power shortages and poor infrastructure, many believe it has taken great strides towards championing the rule of law. The country has genuine political stability for the first time in decades and few Nigerians would swap a slow-moving democratic process for a fast-moving military dictatorship. Strong economic headwinds will buffet Nigeria in 2009 but, unlike in past times, few predict a fundamental breakdown in the economy or government. Nigerians have good reason to be a lot more cheerful than the inhabitants of most developed countries and might perhaps scoop World Values' happiness award again in 2009. In the words of GT Bank's cheerful Mr Aderinokun: "Despite everything, we are happy. We always see the brighter side. Tomorrow will be a better day is the Nigerian adage. We've seen worse before, we'll come back."
