Many frontier markets continue to stand out as particularly attractive to us, as a number of developed, and even some established emerging markets, have been experiencing a few soft GDP growth trends this year.
Frontier markets are considered a subset of emerging markets, often smaller and less developed. My travels recently took me to one of the largest frontier markets, Nigeria, where my team and I were able to see the changes taking place in the country and talk to company owners and managers about the challenges of doing business there. As we scouted for potential investment opportunities, we found some surprises too.
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, it is the most populous country in Africa and the seventh most populated country in the world. The United Nations has projected its population could rise to the top three by 2050, potentially overtaking the US.
Unfortunately, Nigeria also has a tragic history of conflicts and power struggles, being a country that consists of more than 500 different ethnic groups. Since gaining independence in 1960, Nigeria has had eight military governments, numerous civilian-led governments and experienced a 30-month civil war. In April 2011, Goodluck Ebele Jonathan won the elections to become the country’s president. The government faces many challenges, including much-needed reforms, particularly in the oil and power sectors. Economic problems have magnified the ethnic and religious divisions in the country, as per capita incomes are low and there are still great disparities in income levels.
The importance of oil and security
Oil exports, of great importance to the economy, have been disrupted a number of times by conflicts in the Niger Delta, where oil supplies have been targeted by thieves. An amnesty programme has resulted in some reduction in the incidents, but the dangers of instability remain.
Security remains an important issue for businesses in Nigeria, although it doesn’t necessarily mean danger is lurking everywhere in the country. The main security threat is regional, particularly in the northern and Niger Delta areas and mainly from Islamist militants such as the Boko Haram who target security forces, religious sites, telecommunication assets and state infrastructure. With a network of patronage, corruption is also a major problem. The good news is that Nigeria’s leaders are aware of the need to maintain a balance of power between the various regions.
Part of the problem stems from government subsidies of refined oil products, which have led to a vast business of smuggling subsidised fuel out of the country and selling it at higher market prices. In early 2012, the government halved this subsidy and has stated an intention to remove it entirely in the near future. Oil theft in general is a big problem in Nigeria; it has been estimated that about 10% of the total oil production is stolen. Production is now running at about 2m barrels per day (or about 700m a year) which means about 70m barrels are stolen each year.
Inflation has been another problem for businesses and consumers in Nigeria. This year, inflation, as measured by the consumer price index, could finish at single digit levels if near the current pace. This is a significant improvement from the 1990s, when annual inflation rates exceeded 50%. With inflation dropping, Nigeria’s central bank could have more flexibility to lower its benchmark interest rate, as it has been quite high (at 12%) since the end of 2011.
The investment landscape
Nigeria possesses plentiful natural resources but at present is held back by a critical lack of infrastructure. Most hotels and businesses require their own gasoline or diesel electric power generators because of the unreliability of the government power system. This situation speaks to the demand in general for more power sources in emerging, and particularly frontier markets. A South Korean company recently made a much-welcomed pledge to invest US$30bn in Nigeria’s power sector over the next 10 years. In May, the World Bank and IFC also announced plans to invest about $1bn in the country’s energy sector. Foreign investments such as these in Nigeria’s energy sector could further support its economic growth.
Recent plans by the government to privatise the power industry have opened the door to the possibility of dramatic increases in future foreign investment. This could reduce the burden of subsidies on the government budget and spawn profitable enterprises able to pay taxes. The multibillion dollar plan includes the sale of four thermal plants, two hydropower plants and 11 electric distribution companies. If successful, the shortage of electric power and high cost of alternative electricity supply, which has hindered economic activity, should be alleviated and could result in accelerated growth over the longer term.
While most investors are keenly aware of Nigeria’s oil riches, it is important to note that Nigeria now exports 117 different commodities to 103 countries around the world. Although oil remains the dominant export, there are a number of companies in Nigeria unrelated to the oil sector where we see potential opportunities. We visited some of them, including a large cement company.