We have always maintained that Nigeria’s future does not lie with oil, and are encouraged by the high quality government team that is pushing hard for diversification.
We think the government that took office just three months ago is ambitious, smart and realistic. It is a credit to President Muhammadu Buhari that this team – largely unknown to global investors – is of such high quality. On our trip to Nigeria last week it was also refreshing to look at the country’s plans from the government’s perspective – rather than through the financial market lens which at present can focus on little else than the currency and the oil price.
The government is on-message and consistent about its top priorities: security, anti-corruption and the economy. There are no dreams of oil at $100/bl, rather the opposite. Many see low oil prices helping Nigeria force through reforms that will revitalise agriculture, encourage economic diversification, and build a reliable budget revenue stream from the non-oil economy. The government targets a top-100 place in the World Bank Ease of Doing Business (EODB) rankings. Our initial assessment is that if Nigeria can echo what others in sub-Saharan Africa have done, 104th is possible, and if Nigeria can rival others, it could achieve a 71st ranking. Meanwhile there is an encouraging pro-market bias to electricity price hikes, the possible privatisation of the electricity transmission network, and investment plans for the mining and steel sectors.
Most Nigerians were not born the last time oil prices collapsed like this
When oil prices last soared in the 1970s and collapsed in the 1980s, Nigeria suffered three years of double-digit per capita GDP declines. We do not believe Nigeria is fated to repeat this. Less than 10% of children were at secondary school when oil prices last peaked in 1979 – there was very little human capital to drive 1980s’ growth in the absence of high oil prices. Nigeria crossed the crucial 28% education threshold in 2002, meaning Nigeria has the human capital to escape poverty in the early 2020s. Along with more human capital there are also more sources of financial capital, including NGN5tr (5% of GDP) in the pension funds, and in 2016 a targeted $3.5bn (0.7% of GDP) of possible funding from the African Development Bank (AfDB) and perhaps the World Bank, as well as $1bn+ from a likely eurobond. We think the international finance institutions (IFIs) are likely to be supportive of sub-Saharan Africa credits, including Nigeria. The government intends to tap all these sources in its efforts to accelerate much needed investment in infrastructure. It needs to. Nigeria will add 11.4 million more adults to the workforce over 2015-2020 – this is larger than the entire working age population of the Netherlands – so every drop of potential investor money should be welcomed.
The oil price has cut demand for naira by two-thirds
The two-thirds fall in the oil price has cut demand for all oil exporting currencies by two-thirds too. In Nigeria, there is much talk of dollar shortages and a rapid rise in corruption as locals arbitrage between the official exchange rate at NGN198/$ and the unofficial rate at NGN310/$. Nigerian and Latin American history says corruption will be the biggest winner of the current policy mix and undermine the great strides we think President Buhari could achieve during his term in office. More positively, the unofficial market rate is encouraging a Nigerian shift away from imports in line with government aims. It is relatively close to reflecting oil price reality, but remains too illiquid for foreign investors to access. As a consequence foreign equity holdings in Nigeria are probably around $1bn and may fall from here, while they should be $2.4bn and could be higher still. More could be attracted into local currency bonds too if there was more liquidity at the unofficial exchange rate. We are told a review of currency policy is under way.
We have no doubt that 2016 will be a tough year for any oil exporter, including Nigeria, but believe that with the right policy mix, a rebound can come in 2017 supporting government re-election efforts in 2019.
Charles Robertson is global chief economist at Renaissance Capital