Anna Rosenberg, a senior analyst for sub-Saharan Africa at Frontier Strategy Group, looks at the developments that will shape West Africa’s economic powerhouse in the new year.
Nigeria in 2013 will provide a mixed picture for investors. While the government’s 2013 budget promises to open new investment opportunities, challenges lie ahead. Renewed fuel subsidy reductions will impact consumer purchasing power while the security situation in Nigeria’s hot spot regions is likely to deteriorate.
Trend #1: The proposed 2013 budget creates investment opportunities
The Federal Government submitted the budget proposal to the National Assembly for approval. The 2013 budget aims to create long-term macroeconomic stability through continued investment in capital expenditure, deficit reduction, and the development of non-oil revenue sources.
A total budget expenditure of N4.92tr was proposed for 2013, a 5% increase over 2012. Within the budget, capital expenditure increased by 1.3% to N1.54tr while recurrent expenditure was reduced to N2.48tr. The fiscal deficit is projected to improve to 2.17% of GDP in 2013, from 2.85% in 2012, emphasising the government’s commitment to fiscal stability.
The budget assumptions, particularly the benchmark oil price of US$75 per barrel, up from US$72 in 2012, are likely to be disputed by the National Assembly, which will want to push the oil benchmark higher, so it can have more resources to spend. But an increase to US$80 per barrel would leave the country in a vulnerable position should global oil prices fall.
However, the increase in spending means opportunities in sectors that have received high budget allocations or investment incentives. The focus areas for the economy in 2013 are:
- Security: N668.51bn (N348.91bn defense, N319.6bn police). The largest budget allocation emphasises the government’s priority to tackle security challenges
- Education: N426.53bn. A key priority, education expenditure will aim to improve teaching skills and learning
- Health: N279.23bn. Capital expenditure is only N84.1bn – too low given Nigeria’s population size, but opportunities exist
- Works: N183.5bn. Heavy investment in infrastructure by taking advantage of a Chinese loan focusing on housing, railways and roads will help solve infrastructure bottlenecks. Given the nature of the loan, Chinese companies may be favoured for construction projects
- Agriculture and rural development: N81.41bn. Changes in import duties and levies will benefit local production
- Power: N74.25bn. The small allocation demonstrates the government is advancing the privatisation of the power sector, which will raise power costs in the short-term, until private-sector provided supply comes online
The 2013 budget’s impact on key sectors
The industrial sector will benefit from increased investment and incentives. Particularly businesses involved in housing, railways, power, roads, and agriculture will be able to take advantage from new budget outlays. The sugar, rice, aircraft, solid minerals, and public mass transportation sectors will enjoy several incentives including tax holidays, zero per cent duties, levies, and VAT.
The government’s budget allocation to healthcare is disappointing. N279.23bn was allocated to the sector with a capital expenditure of only N84.1bn for use of finishing ongoing projects and the purchase of new medical equipment. As a result, opportunity will remain in the private sector where the increasingly affluent middle class is able to afford advanced healthcare products and services. As Nigerians spend a significant amount of money every year on healthcare abroad, there is a large opportunity to bring this spending closer to home. But apart from the government budget, Nigeria’s 36 states have their own budgets, which provide for additional expenditure on healthcare, creating local opportunities for companies.
No specific budget has been allocated to the technology sector. However, the new ICT ministry, created at the beginning of 2012, was funded to further technology development. The government’s goal is to raise the tech sector’s economic contribution to 5% of GDP in 2016, from 3% in 2012. Areas the ICT ministry has designated as high growth are value-added services, and device and equipment sales and distribution. Medium growth areas are software sales and distribution, and mobile network operators.
Nigeria’s consumer goods sector will indirectly benefit from budget allocations, though most benefits will come from private sector growth. As infrastructure bottlenecks are solved, distribution will become easier. While traditional trade still dominates the Nigerian market, modern trade channels are expanding in part because it is easier to operate with improved infrastructure. As the government aims to create new jobs, fuel education, and tackle poverty, the sector will benefit from wealthier and better educated consumers.
Trend #2: New fuel subsidy reductions will impact consumer purchasing power
The government launched a new campaign to remove the fuel subsidy in the medium-term, a year after the attempted removal caused widespread protests. New plans will see the fuel subsidy gradually reduced through 2015. Consumers will be hit hardest as purchasing power for non-essential goods is likely to decrease. This comes after consumers were strained in 2012 when fuel subsidies were reduced for the first time. The initial impact of the subsidy reduction will be felt in early 2013. As a result, renewed protests are likely to hit the country once the new reductions are announced.
Trend #3: The security situation is likely to worsen
The government allocated the lion’s share of the budget to security, indicating that tackling Nigeria’s many security challenges is a key priority. However, companies should prepare for increasing insecurity in hot spot regions as violence is likely to increase if the budget is spent on recruiting more personnel into badly managed security forces that crack down brutally on dissent rather than on investing in better management and training.
Nigeria’s security challenges include bombings by Boko Haram and ethno-religious clashes in the northern and central areas, kidnapping, oil theft and piracy in the Niger Delta, and kidnappings in the southeast. But the violence is about Nigeria’s acute social disadvantages and widening wealth gap.
Boko Haram: The group’s frequent attacks cannot simply be attributed to Islamist militancy, but rather longstanding socio-economic grievances and skyrocketing unemployment. The group is fighting the government which it blames for the precarious economic situation. As a result, the group wants to install Sharia law because it believes secular law is too corrupt and only religious law can establish order. The security forces’ vehement crackdowns and resulting civilian casualties contribute to an expanding base for recruitment.
Niger Delta: Similar to the situation with Boko Haram, unemployment and poverty is driving crime in Nigeria’s main oil producing region. In 2009 the government issued an amnesty to all militants with the failed promise to create employment. Instead, criminal activity has increased, specialising in oil theft (150,000 b/d, worth US$7bn annually) and kidnappings.
This article is a summary of the Frontier Strategy Group’s Quarterly Market Review of Nigeria. Follow Anna on twitter.