Economics and strategy Country report Nigeria Africa research 17 April 2008 Samir Gadio +44 (0)20 7367 7941 [email protected] Richard Segal +44 (0)20 7367 7908 [email protected] Matthew Pearson Nigeria +44 (0)20 7367 7734 [email protected] On the eve of a breakthrough Nigeria is Sub-Saharan Africa’s most populated country with approximately 154mn inhabitants, making it home to one in five Africans, and Sub-Sahara Africa’s second-largest economy after South Africa. Nascent democratic institutions have been consolidated by the holding of three general elections since 1999, which while at times controversial, have ultimately been endorsed by the international community, and survived legal challenges by opposition politicians. At the same time, the overturning of numerous election results provides evidence that electoral bodies are sufficiently independent and authoritative. President Yar’Adua’s election to the presidency in Apr 2007, which was validated by the judiciary earlier this year, is increasingly perceived as an important step forward in boosting governance and accountability standards in Nigeria. Furthermore, the anti-corruption crusade undertaken by the head of state is starting to bear positive results and signals that the era of impunity is over, notably for senior government officials. We expect GDP to expand by as much as 9.1% in 2008, following growth of 6.3% in 2007. This was higher than expected given that the Yar’Adua Administration took time to settle in after the April elections, and civil strife in the Niger Delta region caused oil-output disruptions. A political settlement of the Niger Delta crisis, the cost of which is estimated at about $60bn since the early 2000s, will be crucial to boosting development in the short and medium term. Nigeria continues to generate healthy current account and budget surpluses, as reflected in the rise in foreign reserves to $60bn and the accumulation of funds into an Excess Crude Account (ECA), currently estimated at $13bn. Foreign reserves could reach $80-85bn by year end, should oil prices remain close or above $100 per barrel. Given these dynamics, it is not surprising that the naira has continued to strengthen. A landmark debt buyback from the Paris Club in 2005 followed by a deal with the London Club in 2006 resulted in sovereign external debt falling from $35.9bn in 2004 to $3.5bn this year. The improvement in Nigeria’s economic fundamentals has been followed by a crowding-in of foreign direct investment. However, this has not yet translated into an improvement in the level of infrastructural development, even in the oil sector. Nigeria requires vast amounts of capital to upgrade its infrastructure and to raise the potential level of growth, as well as to eliminate bottlenecks and improve the quality of life. Infrastructure spending needs are significant across the board and managing this process will be a major challenge for bureaucrats in a country without a track record in this area. On the upside, the pledge by the Bureau for Public Enterprises to speed up the privatisation of power stations, electricity, distribution and marketing companies, oil and gas pipelines, as well as airport facilities, is a step in the right direction. Taken altogether, these structural changes could transform Nigeria into a key geopolitical player in the region, with a GDP being just shy of $300bn by 2010, up from $166bn in 2007, thereby implying an almost doubling of national income over three years. Important disclosures are found at the Disclosures appendix. This research material is released by Renaissance Securities (Cyprus) Limited. Regulated by the Cyprus Securities & Exchange Commission (License No: KEPEY 053/04). 17 April 2008 Nigeria Renaissance Capital Contents Contents 2 Nigeria 3 Country overview 4 Nigeria: An example of Africa’s renaissance 4 Political overview 6 Political background 6 Recent political developments 10 Tackling corruption: President Yar’Adua’s top agenda 11 Political governance and accountability standards are nonetheless improving 12 Niger Delta crisis: the costs come to the fore 13 The real economy 15 Economic growth and output 15 Economic assumptions 17 The external sector 21 Foreign direct investment 23 External debt 24 Foreign reserves 25 Monetary policy and exchange rates 26 Inflation dynamics 26 Domestic credit 27 Interest rates 28 Fiscal policy 30 Exchange rate 30 Further thoughts on the Naira redenomination 31 The emergence of pension funds: a sign of financial deepening 31 Fiscal consolidation 32 The crude oil benchmark and Excess Crude Account (ECA) 33 Tax base bias 33 Controversy over the 2008 budget 34 Concluding remarks 35 The gallery 36 Economic indicators 40 Disclosures appendix 41 2 Renaissance Capital Nigeria 17 April 2008 Nigeria Figure 1: Map of Nigeria CHAD NIGER Sokoto Lake Chad SOKOTO Katsina KATSINA Birnin BORNO N'Djamena Kebbi Gusau JIGAWA YOBE ZAMFARA Kano Maiduguri Dutse Damaturu KANO KEBBI Zaria Kainj KADUNA Reservoir BAUCHI BENIN Kaduna Bauchi GOMBE Gombe NIGER Jos Minna ADAMAWA PLATEAU CHAD KWARA Abuja Jalingo Yola ABUJA CAPITAL TERRITORY NASSARAWA OYO Ilorin Lafia Ogbomosho TARABA Lokaja EKITI Oshogbo KOGI Makurdi Ibadan Ife Ado-Ekiti OSUN Akure BENUE Abeokuta ONDO OGUN Ikeja EDO ENUGU LAGOS Benin City Enugu Abakaliki Porto- Novo Asaba Awka EBONY Bight of Benin CROSS C.A.R. IMO ABIA RIVERS DELTA Owerri Umuahia CAMEROON Aba RIVERS Uyo Calabar Gulf of Guinea Yenagoa Port AKWA BAYELSA Harcourt IBOM Bight of Biafra Source: UN, Renaissance Capital Figure 2: Country snapshot Capital: Abuja (population 2.5mn) Population (2007): 154mn Currency: Naira (code NGN); NGN/$: 117 Year-end NGN/$ forecast: 111.5 Three-month Treasury Bill rate and long bond yield: 8.3% & 11.03% (10-year) Sovereign ratings: Moody’s Baa3/ Stable; S&P BB-/ Stable; Fitch BB-/ Stable Size of GDP (2007): $166.4bn GDP per capita, in $: $1,083 (2007) Real GDP growth (2007): 6.3% Five-year trailing real GDP growth (2003-2007): 6.7% pa CPI inflation (2007): 5.4% Five-year trailing CPI inflation (2003-2007): 12.1% pa Current account balance/GDP (2007): +0.7% Fiscal balance/GDP (2007): +0.9% International Reserves (Mar 2008): $60bn External debt to GDP (2007): 3%/GDP Source: IMF, OECD, S&P, Moody’s, Fitch, Consensus Economics, Official sources, Renaissance Capital estimates 3 17 April 2008 Nigeria Renaissance Capital Country overview Nigeria: An example of Africa’s renaissance Nigeria is Africa’s largest country, with a population of approximately 154mn, making it home to one in five Africans. Macroeconomic stability has been underpinned by a long period of relative democratic rule (including consecutive presidential elections, held on schedule, in 1999, 2003 and 2007) and a surge in the value of oil exports. This is best reflected in a more than doubling of per capita income in dollar terms in the last five years to about $1,083 last year. Stronger fiscal policy and better management of oil revenues facilitated a landmark debt buyback from the Paris Club in 2005. A year later, the government repurchased most of its remaining Brady bonds, although a tender for the related oil warrants proved only modestly successful, largely for technical reasons. The net result has been a fall in foreign public debt from $35.9bn in 2004 to $3.4bn now. We expect GDP to expand as much as 9.1% in 2008, following growth of 6.3% in 2007. This was higher than expected given that the Yar’Adua administration took time to settle in after the April elections, and civil strife in the Niger Delta region caused oil- output disruptions. Even so, Nigeria continues to generate healthy current account and budget surpluses, as reflected in the rise in foreign reserves to $60bn and the accumulation of funds into an Excess Crude Account (ECA), currently estimated at $13bn. Given these financial surpluses, it is not surprising that the naira has continued to strengthen. This may help to contain inflationary pressures this year, driven by oil- related inflows and remittances from the Nigerian émigré communities. Nonetheless, inflation is projected to rise to 8.6% in 2008, from a recent historical low of 5.4% in 2007, reflecting buoyancy in agricultural output. This would still be well below the 17.8% and 8.3% outcomes of 2005 and 2006, respectively. The improvement in Nigeria’s economic fundamentals has been followed by a crowding in of direct investment ($5.8bn in 2006), and we expect the level of FDI to rise further driven by opportunities in infrastructural and credit-constrained sectors as well as planned privatisations. These developments have been acknowledged by two of the main international credit-rating agencies, S&P and Fitch, which rate the country BB-. The ratings were seen as controversially high when they were initially published, but over time Nigeria’s creditworthiness has only improved. Ratings reviews are currently ongoing and the results of these consultations will be published some time during April. Figure 3: Ratings comparison Fitch Moody's S&P Botswana Not rated Aa3 Stable A Stable Gabon BB- Stable N/R BB- Stable Ghana B+ Stable N/R B+ Stable Kenya B+ Negative N/R B Stable Malawi B- Stable N/R N/R Nigeria BB- Stable N/R BB- Stable South Africa BBB+ Stable Baa2 Stable BBB+ Stable Uganda B Stable N/R N/R Source: Fitch, Moody’s, S&P Along with a resolution of the prolonged Niger Delta conflict, which has cost as much as $60bn since the early 2000s, enhancement of the physical infrastructure – poor 4 Renaissance Capital Nigeria 17 April 2008 even by Sub-Saharan standards – are the high-priority political issues for the new government. It will take time before the ECA proceeds and banks’ expanded balance sheets result in incremental financing for Nigeria’s power and general infrastructure.