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AfricaApril 6 2008

Less risk, more reward

Foreign investors’ confidence in Nigeria is improving as governmental efforts to tackle corruption and bribery start to yield positive results. By Nick Kochan.
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Nigeria is “a good place to do business and the perceptions of bribery and corruption are more to do with history than today’s realities”, says Jerome Booth, whose company Ashmore Investment Management has committed over half-a-billion dollars to investment in Nigerian government bonds and a similar figure to real estate.

“Not so,” says another fund manager, who does not wish to be named. “The country is rife with rent-seeking from top to bottom. Every political decision is bought, and every deal tarnished.” Unsurprisingly, the second London-based manager has a small investment in the country.

Mr Booth takes comfort from the political priority given to the crusade against bribery started by former president Olusegun Obasanjo. He says that this has been continued by the recently elected president Umaru Yar’Adua. The change in government reduced perceived political risk.

Changing perceptions

The perception of Nigeria among international investors is strengthened by the government’s determination to resist inflationary pressures so often found in resource-rich countries that import large amounts of dollars. Nigeria is prepared to raise interest rates and allow the naira to appreciate as a buffer against inflation. The stronger currency enhances the attraction of investment in the steadily growing amount of paper issued by Nigerian corporates. Banks have issued one-year paper with yields of 11.5% and this has been sold to many international investors. One investor says: “If you take into account the currency appreciation, you get a 16% to 17% yield and this is quasi-sovereign risk for a government that has no debt. It is the obvious choice – it is the best investment in an emerging market.” Two-year corporate paper offers a 14% yield and is no less attractive.

Growing opportunity

Nigeria’s decision to pay off its debt to the London and Paris clubs of lenders means that bond pricing remains more of an art than a science for local markets. The real estate sector also presents growing opportunities for investors reassured by the government’s determination to restrain inflation. Infrastructural renovation is one of the national priorities, and the inflow of petrodollars is fuelling a building surge.

Mr Booth says: “It is highly likely that there will be a construction boom in a commodity-rich economy. If the commodity shock is temporary, people will save money and invest rather than spend it. They will invest it in imported capital goods and domestic capital goods such as construction. The construction sector is an area where people will invest – as well as the power sector – that is the political priority.”

Foreign investors have set up partnerships with local banks to invest in real estate. Local banks are prepared to pay generous spreads for access to medium-term capital. Nigerian banks have little capacity to borrow medium-term money – deposits tend also to be short term – so this lending fills a gaping hole. Mr Booth says: ‘There is a big demand for financing from underlying projects. One could lend directly to a bank but this type of financing, entailing a significant exposure and liability mismatch for the banks, is often not their preference. An investor will be more comfortable with a local bank involved. One solution is to finance the underlying project but with bank guarantees.” Another investor says: “A bank taking $100m is a huge concentration of risk. Most Nigerian banks cannot take that sort of paper.”

Real estate boom

Government commitment to Nigeria’s banking sector underpins investors’ confidence in banking stability, a vital component in the strategy. Alex von Sponeck, Merrill Lynch’s head of CEEMEA debt capital markets, says: “Real estate is interesting. We did a real estate financing of a large residential complex to the east of Lagos. There is a lot of free space in that part of the city and quite a lot of financing demand. There is a severe lack of office space there.”

Mr Von Sponeck also pinpoints investment potential in the oil and gas sectors. “We have helped Oando (a large Nigerian energy company) to do the first ever purchase of a producing oil field from Shell. It was $200m in naira over two years. Our investors had a huge appetite for that transaction.” The deal will produce a healthy 13% to 14% return on a leveraged basis. “We underwrote and structured the whole deal and we have sold a good portion onto the market,” he adds.

In spite of the changes in economic fundamentals, Nigerian political risk remains. But investors in Nigeria believe that the rewards now outweigh the risk. They say that Nigeria’s time has come.

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