A new way forward for Nigeria?
A new way forward for Nigeria?
A couple of
years ago, many investors were optimistic about Nigeria and the stock
market was booming, buoyed by strong economic growth and government
reforms to improve the country.
However, by 2014, the mood soured amid a
series of unfortunate events, including the terrorist acts of Boko
Haram, an Ebola outbreak and the weakening price of oil, which is the major source of income for the government and has a big impact on the economy.
Despite these challenges, we continue to pursue long-term investments in Nigeria for
a number of reasons. Not only is Nigeria Africa’s largest economy and a
major consumer market, but the outcome of Nigeria’s presidential
election in March proved its people are ready for change – hopefully for
the better.
After a delay, Nigeria’s presidential
election took place in March in a relatively peaceful environment. After
lots of active and noisy election campaigning, the results showed that
the incumbent, President Goodluck Jonathan, was losing, and he conceded
defeat to former military ruler Muhammadu Buhari. Buhari has claimed a
commitment to democracy and a new way forward for Nigeria, although I
think his first order of business will be to bring stability to the
country. The fact that he was elected democratically and had run
unsuccessfully in 2003, 2007 and 2011 seems to be an indication that he
would be more inclined to favour the democratic process, although we
certainly can’t know what might happen in the future; we must remember
that he has a military background and participated in a military coup
that brought him to a short-lived presidency in 1983. We do feel his
military experience should help him battle terrorism and corruption in
Nigeria, so in that sense the election results seem positive.
The election outcome was not surprising to
me, because it was clear that the general population was unhappy with
the current situation in the country. Nigeria’s stock market reacted
positively to the election results right after they were announced,
indicating that many investors may now feel new hope that there could be
change for the better.
Nigeria clearly has a compelling growth
story, but has faced a number of challenges in recent times. One of its
biggest current challenges is a new lower oil price environment, which
means that the government will likely have problems funding development
and must find new sources of income. Hopefully, this situation will lead
to much-needed reforms and a crackdown on corruption to unlock such
income. (Last year, the head of the central bank asked why US$20bn was
missing from the oil fund accounts.) While lower prices will likely have
an adverse impact on Nigeria’s fiscal situation and foreign reserves,
government debt is only 13% of gross domestic product (GDP). Planned
spending cuts and efforts to improve tax collection in the 2015 budget
should mean the government will unlikely face major funding issues this
year. While important to the economy – representing the largest part of
government income – the oil and gas sector actually equates to less than
15% of Nigeria’s total GDP. Nevertheless, the oil price decline has
prompted the government to reduce its 2015 GDP growth forecast to 5.5%
(down from an estimated 6.23% in 2014); GDP growth still looks to remain
strong this year.
Nigeria is a big country, and with
privatisation and government reform efforts, I still believe there is a
good chance of strong growth going forward, even if oil prices don’t
rebound significantly from today’s levels.
There are significant challenges ahead, but
we believe the positives outweigh the negatives and think it’s a good
time to invest in Nigeria – if we are patient and selective. We are
particularly interested in opportunities outside the energy sector in consumer products
as well in financial services. Last year, the Nigerian financial sector
did not perform well mainly due to concerns about the suspension of the
central bank governor (after he brought up the aforementioned missing
funds to Goodluck Jonathan), and social issues. We do not believe the
new government will disrupt the independence of the central bank. The
newly appointed governor has a solid technical background. Besides, he
has been working with the central bank for many years. We believe recent
central bank liquidity-tightening measures are likely temporary and
aimed against inflationary pressures. Also, we think these events are
unlikely to change the long-term fundamentals and positive outlook for
banks – the people of Nigeria remain “under-banked” compared to other
emerging and developed markets, and strong local banks are likely to be
prime beneficiaries of long-term economic growth.
The long-term, fundamental case for Nigeria looks strong to us for several reasons:
- Nigeria boasts one of the fastest-growing economies in the world, with GDP growth rates above 6% every year since 2003.
- Home to more than 170 million people, Nigeria is the largest country in Africa by population, and among the top 10 most populous countries globally. Additionally, the population is relatively young, with a median age of just over 18.
- It is important to note that Nigeria exports more than 100 different non-oil commodities as well as a wide variety of finished or semi-finished manufactured products to countries around the world. While oil remains the dominant export, we also see many potential opportunities beyond the energy sector.
We believe efforts toward privatisation and
investment in areas such as mining, agriculture, finance and
manufacturing to diversify the country’s dependence on the oil sector
could bear fruit in the longer term. Nigeria benefits from a diverse
range of potential growth drivers – for example, many people outside
Africa may not know that the Nigerian movie industry, “Nollywood,”
generates nearly $600m a year and employs more than a million people.
While a lower oil-price environment could prove a short-term test,
perhaps the biggest long-term challenge for Nigeria going forward is to
develop government leadership that will be intent on economic
development and utilising the country’s resources to develop
infrastructure – roads, railroads, electric power, sewerage, water, and
so on. We believe this would establish a platform for the growth of new
enterprises and likely lead to more employment.
In our view, Nigeria still remains among the
most attractive investment destinations within frontier markets and we
are hopeful its new leadership will pave the way forward toward a
brighter future.
-Mark Mobius is executive chairman at Templeton Emerging Markets Group. This article first appeared on his blog.
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