In April this year Nigeria, already Africa’s most populous country, overtook South Africa to become the continent’s largest economy. A long overdue rebasing of the Nigerian economy saw industries such as airlines, telecoms and e-commerce included in the country’s GDP figures for the first time. The statistical re-shuffle added 85% to the country’s GDP overnight, which now totals $510 billion, making Nigeria the 26th largest economy in the world.
Nigeria has come a long way since gaining independence from the United Kingdom in 1960. The initial signs were positive following independence and the country being awarded an ‘emerging economy’ label. However, political turmoil, which included several military coups and a civil war, and unfavourable economic events, have conspired against the country. Although some impressive growth was recorded during the oil boom of the 1970s, the adverse political climate meant the benefits were not passed down to SMEs, or to the general population, and the growth levels couldn’t be sustained. All this led to, at the turn of the century, Nigeria being one of the poorest economies in the world.
Since then, political reform and democratisation, has brought an end to over 30 years of military rule, putting Nigeria back on track to achieve its full economic potential. The country is now regarded to be a lower middle income emerging market. Oil still remains at the heart of the economy, and is the nation’s primary export to countries such as the US, India and the Netherlands. Nigeria’s main imports are primarily machinery, chemicals, transport equipment and manufactured goods from China, the US and India.
In recent years, the government of Nigeria has looked to move away from its dependence on oil. And the recent rebasing of the economy demonstrates the increasingly diverse nature of the Nigerian economy as the services sector now accounts for 52% of GDP, and manufacturing rose from 1.9% to 6.8%. At the same time, the oil and gas sector declined relative to GDP, falling from 32.4% to 14.4% after rebasing. Nevertheless, the oil and gas sector still remains the main revenue driver from the Nigerian government.
Due to these developments, and its large, youthful population, the long-term outlook for the Nigerian economy is positive. The nation was famously named as one of the high economic potential MINT (Mexico, Indonesia, Nigeria, and Turkey) countries, a term coined by Fidelity Investments.
To help the country fulfil that potential, the government introduced ‘Vision 20:2020’ in 2009 – an 11 year economic plan which looks to stimulate economic growth and place the country on a path of sustained socio-economic development. Five years on, although the message from the government is that the plan remains on track, Standard and Poor’s has revised its outlook for the country, downgrading from CreditWatch negative to negative, citing political in-fighting and political and institutional risks. The downgrade is a sobering reminder that, despite the positives of recent years, the country still has a number of pressing issues to resolve before it can fully step-up.
Key challenges
One of the key challenges facing Nigeria is poverty. The World Bank earlier this year stated that 33.1% live in poverty, 55.9 million of the 162 million population. However, the Nigerian National Bureau of Statistics estimates that 120 million of the 162 million people in Nigeria, 67% of the population, live in poverty. Whichever the amount, income inequality, political instability and corruption are largely regarded as the key reasons for the poverty levels and the government’s anti-poverty programmes are struggling to overcome the challenge.
Elsewhere, despite the political reforms, the political situation in the country still remains fragile, with in-fighting dividing the country’s ruling party, the People’s Democratic Party. In addition, sectarian violence is commonplace throughout the country and has caught the worldwide media’s attention in recent months through the actions of Boko Haram, a militant Islamist movement based in the North East of the country. This type of violence can bring challenges to businesses as some areas of the country are too dangerous to move goods through.
Little surprise, then, that Nigeria is widely regarded as a challenging place to do business. The World Bank ranks the country 147th out of 189 in its Doing Business 2014 survey, citing not only socio-political conditions but also infrastructural challenges. Basic services such as electricity are in short supply – the World Bank ranks the country 185th out of 189 in terms of ease of getting electricity. And when electricity is not an issue, transportation is: take the underdeveloped roads and transportation networks which often create delays in moving goods around the country, for example. This can cause supply chain, forecasting and inventory problems for corporates operating in the country which can significantly increase the cost of doing business, not to mention the effect on a corporate’s cash conversion cycle. It is also extremely difficult to register property in Nigeria and a weak rule of law and judiciary in the country mean that companies may be exposed to corruption and political interference.
Yet, despite all the challenges, many companies are thriving and Nigeria remains one of the top three destinations in Africa for foreign direct investment with inflows of $5.6 billion in 2013 according to the United Nations Conference on Trade and Development.
A revamped financial sector
As foreign investment and corporate involvement in Nigeria have increased, the country’s financial sector has undergone significant changes following years of underperformance. To modernise and strengthen the sector, the Nigerian government has sought to consolidate the banks, raise the levels of capitalisation required, adopt a risk and rules-based regulatory framework, while also strengthening existing laws. The reforms have had a dramatic effect on the sector which now exists with just over 20 banks compared to over 100 a few years ago. “If we look at the legacy Nigerian banking landscape and compare that to what we have today, it has improved vastly over recent years,” says Sam Ocheho, Head, Global Markets, Stanbic IBTC.
The sector is regulated by the Central Bank of Nigeria (CBN) and comprises mainly local banks and a handful of global banks. As is the case in many emerging markets, local banks dominate in the payments and collections space due to their expansive branch network which penetrates the furthest reaches of the country. The global banks on the other hand are primarily focused on the larger scale domestic corporates and international corporates offering more complex outward facing products and connecting these companies to the global financial system. “We find that multinational companies in Nigeria want to use one global bank in the country alongside relationships with one or two local banks,” says Segun Adaramola, Head of Treasury and Trade Solutions at Citibank Nigeria. “In doing so, they are able to leverage the international banks for their sophisticated outward looking business while also using a combination of local and international banks for their domestic collections and payments.” Corporate funding is widely available to all sectors of the economy and this is offered using an informal tier system. The large international companies will readily have access to the cheapest funding – in some cases it has been reported that these companies obtain cheaper funding than the government. The range of products which banks are offering to corporates is also increasing, especially as the nature of Nigerian businesses becomes more global and more complex products are called for.
Foreign exchange rules
The banks also play a key role in assisting corporates to move capital in and out of the country. In order to keep the managed exchange rate stable, the CBN has regulated the foreign exchange market extensively and there are a number of rules corporates must follow to import and remit funds. “If a company is looking to bring funds into the country, it must seek a certificate of capital importation,” says David Adepoju, Head of Global Markets at Standard Chartered. “Only with this document will it be able to then convert the principle investment and capital gains from Naira to USD and repatriate.”
To make the process of both importing and exporting funds easier for corporates the CBN has empowered banks to grant a certificate of capital importation based on a set of guidelines, if these guidelines are not met then the corporate will need to seek central bank approval.
Additional documentation is also required to remove profits from the country. “A corporate is required to demonstrate the transaction history of the investment in order to repatriate the full amount,” says Adepoju. “The best way to do this is by leveraging a bank or custodian, because although the process isn’t necessary complex, a bank is well placed to help guide corporates through this area.”
A further headache for corporates looking to repatriate profits from Nigeria is that the country can sometimes lack dollar liquidity, despite petrodollars and remittances from abroad bringing $63.17 billion dollars into the country in 2013. The level of liquidity depends on what the CBN is doing at the time. But at times that it is limited, it can make taking money out fairly difficult for corporates.
Recognising the increasing importance of China to the Nigerian economy, trade between the two countries hit almost $13 billion in 2013, and the CNB announced plans to convert an additional 5% of its dollar reserves into yuan. In an interview with Bloomberg, CBN Deputy Governor Kingsley Moghalu, stated that “It was clear to us that the future of international economics and trade will shift in large part to business with and by China. Ultimately, the renminbi is likely to become a global convertible currency.”
A growing hedging market
Hedging products are widely available for corporates in Nigeria, yet despite increasing global trade, they are still rarely used. “Very few companies have a hedging strategy in place,” says Ocheho. “For me this is either due to lack of capacity, prohibitive costs; lack of education or parent companies policies against hedging by multi-national companies across some jurisdictions. Companies are therefore leaving themselves open to exchange rate volatility as they develop into the global market – and also interest rate volatility.”
The primary hedging products which are available to corporates are vanilla forwards and swaps. But in a bid to increase the popularity of the derivatives market in Nigeria, the CBN has been hard at work. “The market in conjunction with CBN has developed a new OTC exchange (FMDQ OTC), a self-regulatory body for OTC transactions in Nigeria,” says Ocheho. “The company is expected to increase the level of transparency in our financial market and also build a credible platform where more complex derivatives trades can be done.” Standard Chartered’s Adepoju paints a similar picture: “As the amount of capital and finance which the country’s banks and corporates have expands, and the duration of banking books and corporate loans becomes longer, there will be much more activity around hedging and the market will start developing more quickly. This is something which we have already started to see in the oil and gas sector, for example.”
The end of cash
A report released by MasterCard earlier this year showed that Nigeria spends $5.1 billion a year printing and handling cash, approximately 1% of its annual GDP. In order to reduce costs and mitigate the risks of such a heavily cash-based economy, the CNB introduced a cash lite policy in 2012 which looks to reduce the circulation of cash and move to electronic transactions. As part of the 20:2020 project, this began in Lagos and has since spread further across the country.
The main elements of this policy include a cash handling charge on daily cash withdrawals that exceed 500,000 naira for individuals and three million naira for corporates. “Two or three years ago, cash in Nigeria accounted for about 60% to 70% of transaction volume. As of today this figure has reduced to around 40% or less” says Citi’s Segun Adaramola. This shows the impact of the cash lite initiative and the growing importance of electronic payments in the country.” To facilitate the project, there has been an overhaul of the country’s payments and settlements systems. “The payments and settlements system in the country is now excellent,” says Standard Chartered’s Adepoju, “and this is positive for all corporates in the country.” The improvements have meant that corporates are able to make payments using the improved Real Time Gross Settlement (RTGS) Service within an hour and sometimes in less than ten seconds, depending on the value. “There has been a lot of work to ensure that this works smoothly,” adds Adepoju. “Also the CBN has put in place a process whereby cheque clearing has been reduced to one day, again helping corporate operations in the country.”
Having only been implemented across the majority of the country earlier this year, the jury is still out on how the project will work in the less developed cities and regions. Nevertheless, Adepoju doesn’t believe that there will be any significant challenges for corporates and that it is overall a positive development. “Most corporates would prefer to use electronic transfers because cash is expensive to handle. Using electronic platforms also allows corporates to have better real-time view of cash flows.”
The technological infrastructure, however, may hinder the development of the cashless policy. Despite significant improvements, broadband penetration across the country is low with an adoption rate of around 15% – the global average is 35%. This may prevent consumers and SMEs from readily adopting electronic payments, meaning that corporates will still need to handle a large proportion of cash.
Cash management
When it comes to investing excess cash, short-term investment instruments in the market are also vanilla – with bank deposits, bankers’ acceptance and treasury bills being the most commonly used. Money market funds (MMFs) are available in Nigeria from the leading domestic banks and government treasury bills are often used by sophisticated corporates in the country.
It is expected that as further economic development attracts more international corporates to the country, the sophistication of cash management products will increase. “As the demand creates more financing to be required by corporates then more complexity will enter the treasury landscape in order to manage the additional risk. We expect to see many exciting developments in the coming years” says Adepoju.
A developing market
In short, Nigeria is a country with giant potential and while on the whole the future looks bright, there are many challenges to overcome in the short term. It is predicted that the upcoming elections in 2015 will run smoothly – and after that, further improvements in political and social stability can be expected. Moreover, as Nigeria continues to improve its infrastructure and business landscape, the cost of operating in the country should decrease. This should drive more foreign investment into the country, which will generate greater opportunities for the young population. Organic growth such as this will help Nigeria to maintain its leading status in Africa, while also moving towards its global aspirations.
