For a long time Nigeria was considered the epitome of a frontier market.
The country’s shady internal politics and complex regulatory framework meant that only the hardiest investors braved Africa’s largest market. As in the Great American West, prospectors would set out with gold in their eyes; seeing risk as opportunity if handled correctly. Fortunes were made and lost.
As Nigeria now transitions into one of the world’s leading emerging markets with strengthened financial infrastructure and meaningful policy reforms, the opportunities remain while some of the risk has been lessened.
The government has been working hard to this effect and post-recession some of the indicators are looking good. Nigeria gained 24 places in the World Bank’s Doing Business report last year and investors are beginning to take notice. That said, reforms will need to be ongoing as Nigeria continually fails to attract enough capital to satisfy its pressing development goals.
Nigeria is an attractive market primarily because it affords access to a large consumer base characterised by a growing middle class. The key things that matter most to investors and businesses are the nuts and bolts of doing business – paying taxes, securing credit, registering a new enterprise – and the macro-economics at play, including the availability of foreign exchange, currency stability and interest rates.
Improvements in both these areas have spurred the recent appetite for investing in Nigeria. Yewande Sadiku, CEO of the Nigerian Investment Promotion Commission, points out that Nigeria attracted $12.4bn of foreign investment in 2017 as compared to only $5bn the year before.
The gains Nigeria has made in reforming its business fundamentals have come about largely due to concerted government policy and the establishment of numerous agencies tasked with monitoring and improving the corporate landscape. In February 2017 vice-president Yemi Osinbajo launched a 60-day National Action Plan through the newly formed Presidential Business Environment Council tasked with eliminating bureaucratic and regulatory constraints.
One element was streamlining business registration, and a Corporate Affairs Commission was established to process applications within 48 hours. Another was merging multiple agencies working at the ports to speed up cargo examination and facilitate the easy importation of goods into Nigeria. Tourist visas have been reduced to a maximum of 48 hours issuing time and the time taken to gain title to land has been reduced.
Various laws have also been introduced to facilitate easy access to credit, particularly for small to medium enterprises. Credit is often refused in Nigeria due to insufficient credit history or unacceptable collateral. The Collateral Registry Act now allows small businesses to register their movable assets such as motor vehicles and equipment as collateral for accessing loans thereby drastically increasing their ability to access finance. Similarly a Credit Reporting Act has been introduced to share credit information between credit bureaus, lenders, telecommunications companies and retailers.
For Sadiku the advances Nigeria made in the Doing Business report were due to an amalgamation of the above public-led reforms.
Along with a business-friendly policy framework the market fundamentals of any country will be a key selling point to an investor. Rising oil prices coupled with some key initiatives has led to renewed economic activity and domestic production which has rebalanced the country’s economic indicators. Inflation has been steadily dropping over a period of two years leading to its lowest rate at 12.5% in April.
The benchmark interest rate is currently held at 14% – which may attract certain types of investors – but there may be room for the cautious central bank governor Godwin Emefiele to cut the rate and encourage cheaper borrowing and spending. Most important, however, has been the introduction of the Investors and Exporters (I&E) Foreign Exchange Window. The window was introduced in April 2017 to improve liquidity in the foreign exchange market, which had been severely damaged by both the drop in production and the price of oil.
As a consequence of the commodity downturn the naira weakened against the dollar and following a devaluation in mid-2016 the currency remained volatile and the black-market surged.
The window allows investors the opportunity to sell dollars at rates of their choosing providing they can find willing buyers, thereby increasing liquidity and ensuring that investors have a working instrument to be able to get dollars out of the country if need be. As a result an enormous amount of capital has entered the Nigerian market since the introduction of the window.
As Sadiku explains, in Q1 last year Nigeria attracted $908m. The window was introduced in Q2, which led to an instant influx of $1.9bn, finishing in Q4 with $5.4bn. Moving from a period of intense dollar shortage, Nigeria’s foreign reserves hit $47.37bn in April.
“The I&E window signalled we were ready for business,” says Babatunde Obaniyi, managing director of investment banking at United Capital. “In Q1 there was very little FDI coming into the market. By Q4 it was a rally.”
At a similar time the Nigerian equities market also experienced a rally, posting a growth of 42.3% in 2017. This uptick was a direct result of both the I&E window and rising oil prices, explains Tosin Osunkoya, CEO of trading firm Comercio Partners. “We have seen massive participation from foreign investors,” he says.
The question, however, is how long will the rally last? With the 2019 elections looming, many are trying to capitalise on the good times in an effort to prepare for the unpredictable.
“Maybe by the time we get to Q3 there will be a slowdown in capital flows, so we are trying to pace up on everything we are doing to see if we can close our transactions by that point,” says Obaniyi. “You want to be sure you are watertight if anything happens.”
Nigeria’s infamous sector
At the same time, discussions around Nigeria’s business environment will inevitably lead back to the continent’s poster boy for unworkable sectors: the oil and gas industry.
The sector has been chronically underfunded in the past and many would argue for good reason. A mix of extra-legislative contracts, unofficial middlemen, beleaguered parastatals and very few legal guarantees has historically dissuaded international investment into the sector. However, as a barometer for Nigeria’s overarching business environment, if the sector shows improvements it can be assumed that the rest of Nigeria’s corporate landscape is also faring well.
Some improvements are being made on that front. The Petroleum Industry Governance Bill (PIGB), one part of the long-awaited Petroleum Industry Bill (PIB), has been passed by the National Assembly and is awaiting the signature of President Muhammadu Buhari.
The PIB, which also includes the Fiscal Regime Bill, the Upstream and Midstream Administration Bill and the Petroleum Revenue Bill, aims to increase transparency and stimulate growth within the country’s oil industry. Between them, the four separate bills provide regulatory clarity on all aspects of investing in Nigeria.
“The bill removes uncertainty around regulations and taxes for all potential investors,” says Dada Thomas, CEO, Frontier Oil Limited and president of the Nigeria Gas Association.
As Nigeria’s reforms trickle through and the economy begins to rebound international appetite for investing in Nigeria will only increase.