Nigeria

Super-Size me: high potential, low achievements

D3

SENSITIVE RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD486.8bn (World Ranking 23, World Bank 2015)
Population 182.20mn (World Ranking 7, World Bank 2015)
Form of state Federal Republic
Head of government President Muhammadu Buhari
Next elections 2019, presidential and legislative
  • Dominant economy in West Africa in terms of population and GDP and now the continent’s largest economy.
  • Hydrocarbons resource base, with 2.2% of global oil reserves (11th in global rankings and 43 years of additional extraction at current rates) and 2.7% of natural gas reserves (9th and over 100 years).
  • High oil prices in 2011-2014 boosted export earnings, provided current account surpluses and accumulation of international reserves (import cover markedly in excess of the international comfort benchmark of three months).
  • External debt ratios are again deteriorating but remain comfortable.
  • With oil and gas accounting for over 90% of export revenues, the economy is susceptible to volatility in global markets and to large swings in energy prices.
  • The federal government is hampered by the strength of state and tribal authorities. Deep ethnic, religious and regional divisions provide risks to systemic stability.
  • Personal and corporate security is high risk.
  • Long history of economic mismanagement and corruption continue to affect perceptions of doing business in the country.
  • Data provision remains poor for a country of such size and strategic importance.
  • Weak investment level.

Big is beautiful…or not

Nigeria is a land of opportunity locked in a poor governance trap inhibiting gravitational growth drivers. The country’s main strength is its size and increasing urbanization.

A Euler Hermes index covering 54 African economies shows Nigeria has the best Consumption Potential, driven by urban population growth and good internet access. Moreover, urbanization could support Nigeria’s effort to capitalize on its infrastructure potential as the gap between basic and full access is among the widest in the continent. 

However, bad governance stifles growth potential. The World Bank’s Doing Business 2019 survey ranks Nigeria 146 out of 190 countries, with some good items (getting credit, 12th) but many very bad ones (registering property 184th, trading across borders 182nd, getting electricity 171st). . The outcome is poor confidence in the economy. Currently, 75% of corporate transactions are paid in cash (0-day DSOs). If these transactions earn a 30-days payment term, it would free up about USD 11bn of cash (about 3% of GDP) and act as a big stimulus.

Moreover, high potential based on a catch-up of infrastructure gaps is basically constrained by poor governance, such as difficulties to implement federal rules at a provincial level. It triggers a poor implementation ratio of planned spending.

The cost of poor governance is also sizable in terms of investment. The investment ratio is 12% of GDP, a clear sign the country doesn’t build its capital stock. Sustainable investment ratios (30% of GDP) allocated to closing the infrastructure gap would add USD 70bn to Nigeria’s GDP.

Poor governance exacerbates financial and economic vulnerability

Nigeria is not just an oil economy and domestic consumption has grown. Still, petroleum exports remain the main source of hard currency. When the oil price slump crisis erupted, Nigeria faced an acute dollar scarcity, a particularly complex problem in a 0-day DSO economy. The economy came to a sudden stop in 2016, and GDP growth collapsed from +2.7% in 2015 to -1.6% in 2016.

Moreover, poor public spending implementation (a stimulus was delayed by about 6 months) and a self-defeating exchange rate policy added to the credit crunch. In June 2016, the Central Bank decided to devalue the Naira. It then got rapidly bogged down by a fixed exchange rate regime despite a wide margin with the black market exchange rate. The regulator introduced tough capital controls to tame speculative pressures, drying up liquidity in the country. After some quarters with a visible gap between official and black market exchange rates, NGN depreciation closed it and the easing of capital controls ended the credit crunch. However, since then growth recovered only gradually (+0.8% in 2017 and +1.8% in 2018) and missed former targets.

Nigeria renewed with sizeable fiscal deficits (-5.5% of GDP expected in 2019), but debt remains quite sustainable despite a trend increase, since it came from a low level after strong debt haircuts implemented in 2006: public debt will represent 29% of GDP in 2019 and external debt should reach 9.5% of GDP next year. Moreover, a stronger oil price in 2017 and 2018H1 favored strong capital inflows: It helped the import cover of foreign reserves to grow to about 8 months. However, it was financed more through debt (USD 5.4bn Eurobond issuance in 2018, and bilateral lending from China) than FDI.

Political risk remains the main issue 

The relatively peaceful transition to the presidency of Muhammadu Buhari suggests democracy is becoming entrenched. However, the country is a federation of states of varying size and economic power, encompassing a plethora of ethnic, tribal and religious groupings. These overlapping ethnic and religious identities are often in conflict with Nigeria’s federal system, as customary authority continues to play a crucial role in the country.

Internal regional economic differences and endemic corruption pose ongoing threats to stability and inhibit effective policymaking. In particular, these threats are indicated through religious differences and disputed claims on oil resources. Disputes between state powers and indigenous groups (particularly in the oil-rich Niger delta) and the federal government over allocations of oil earnings have led to sharp divisions and lawlessness.

Unemployment has also risen to about 23% in 2018Q3, as a result of low growth. Unions are key opponents to projects such as the African Continental Free Trade Area, and Nigeria is among the countries where this project is the most criticized. Moreover, the current social context is adding uncertainty to the next Presidential election (February 2019).

Trade structure by destination/origin

(% of total)

Exports Rank Imports
India 24%
1
25% China
United States 9%
2
10% United States
Spain 8%
3
9% Belgium
France 6%
4
5% United Kingdom
South Africa 5%
5
5% Netherlands

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum, petroleum products and related materials 78%
1
12% Petroleum, petroleum products and related materials
Gas, natural and manufactured 11%
2
11% Road vehicles
Coffee, tea, cocoa, spices, and manufactures thereof 2%
3
6% Other industrial machinery and parts
Other transport equipment 1%
4
5% Telecommunication and sound recording apparatus
Metalliferous ores and metal scrap 1%
5
5% Specialised machinery

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Stéphane Colliac

Senior Economist for France and Africa

stephane.colliac@eulerhermes.com 

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