Notes from the Nigerian frontier

Cement

The executives of the cement company said they planned to increase local production capacity by some 9m tons per year by 2016. To promote local production, the government gives a tax holiday of three to five years to new plants. Nigeria has plenty of high quality limestone, the main raw material for cement, in addition to relatively cheap gas to run the plants. Domestic demand for cement is growing at about 10% per year with most going to the private sector and relatively little to the public sector, which we see as an indication that infrastructure spending in Nigeria is lacking. However, this trend appears destined to change.

One executive at the firm said Nigeria’s biggest challenge was a lack of effective political will and, in particular, little willingness to promote the domestic agricultural sector, since Nigeria is importing $1.2bn worth of food products each year. However, he also believed the government was generally constructive and had a good economic advisory team.

Beverages

We also visited a beer producer. Executives of the firm said the operating environment has been affected by fuel price increases and higher power prices. In addition, distribution is sometimes a problem given security challenges. However, the real problem contributing to instability was seen as high unemployment and a young and fast-growing population who want jobs. While the definition of “middle class” may not closely mirror that of developed countries, there is an expanding class of consumers who have growing amounts of discretionary income to spend, so food and beverage companies are hoping to benefit.

Banking

Nigeria’s reformed banking system has provided many foreigners with an attractive means to invest in the fast-growing domestic economy. The banking industry is important, not only because of the rise of microfinance, but because of the move by banks into consumer banking. Until recently, banks were mainly financing large businesses or the government through bond purchases. Following a banking crisis in 2008, the Central Bank of Nigeria conducted an audit of the commercial banking sector. All banks that failed the audit had their CEOs replaced. The state-owned Asset Management Corporation (AMCON) was created to purchase non-performing loans and recapitalise the unhealthy banks. A recent review of the country’s banks by the International Monetary Fund (IMF) showed a dramatic increase in profits for the industry in 2012, while the capital adequacy ratio was above the minimum requirement of 10% and non-performing loans were below the mandated threshold of 5%.

Executives at a Nigerian bank we visited were quite honest about the challenges they face. They felt the market was inherently risky amid political uncertainty, a potentially volatile currency, and state interference and corruption. The good news was that the AMCON clean-up of the banking sector was now complete and bank managements were working to meet their growth targets and become more profitable. They anticipated growth would come from lending for infrastructure projects, power and agriculture. In addition, the consumer banking market has been expanding fast. Like a number of Nigerian banks, this bank was multinational, with operations outside the country.

Food

Another company we visited was a leading food-focused conglomerate, with a range of fast food restaurants and branded food products catering to a broad section of the population. The executives echoed the security issues we heard elsewhere, particularly in the north of the country, which affected its distribution and manufacturing. Perhaps even more important from their perspective were the increased import duties and levies on wheat, impacting input costs in food manufacturing and restaurants.

Oil

In the oil sector, we visited a firm that has changed its strategy and transformed from being just a core local downstream oil marketing concern to becoming an integrated energy group with business lines spanning not just petroleum marketing but also the exploration and production of crude oil, international oil trading, gas and power solutions, and oil services support.

Like all our travels, these visits to Nigerian companies were important for us to see exactly what issues business owners face and how they are dealing with them. We believe the Nigerian economy and body politic should strengthen as the country moves forward with reform efforts, and we think our investment opportunities there will expand. Nigeria represents an intriguing investment destination to us, and not only because of its oil riches. Government efforts in the areas of privatisation and investment in industries such as mining, agriculture, finance and manufacturing to diversify its dependence on the oil sector could help the economy in the longer term.

Mark Mobius is executive chairman of Templeton Emerging Markets Group. This article was first published on his blog.