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
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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
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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
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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. 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. Official estimates suggest that Nigeria will need to invest $34bn per annum to overcome current infrastructure deficiencies, although such estimates are typically overstated and ignore project-implementation capacity constraints. Nonetheless, the attention of policy makers and international investors in Nigeria in recent years suggests that major infrastructure projects are no longer destined to fail. Should these two major issues be successfully addressed, Nigeria will have progressed in its long-term objective of transformation from a regional to a key geopolitical power.
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Political overview
In this section, we provide an overview of Nigeria’s political background which has been characterised by a dominance of regionalism throughout the country’s history. Nigeria has also experienced a series of repressive military regimes, despite short- lived democratic episodes in the early 1960s and 1980s, compromising the country’s development prospects. On the upside, the return to constitutional normality in 1999 seems to have enabled the implementation of key structural reforms in recent years. President Yar’Adua’s election to the presidency in Apr 2007, and the confirmation of its validity 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 signals that the era of impunity is over, notably for senior government officials.
Political background
Nigeria obtained its independence from the United Kingdom on 1 Oct 1960 under a constitution that provided for a parliamentary type of government and substantial autonomy for the three main regions. The central government of the new republic was rather weak, having exclusive prerogatives in defence, foreign relations and economic policies. This is consistent with the importance of regionalism and communautarism in the early history of Nigeria, and indeed until now, which is illustrated by the fact that the three main political parties represented specific community groups.
Regionalism is omnipresent in post-independence years
The Nigerian People’s Congress (NPC) represented the Muslim Hausa and Northern interests, while the National Council of Nigeria and the Cameroons (NCNC) was Christian and Igbo-dominated, and was predominant in the Eastern region. The other major political organisation, the Action Group (AG), was a Yoruba-dominated party controlling the Southwest of the country. The first democratic election held in 1959, just a year before independence, resulted in an NPC victory, which secured 148 seats vs 89 and 75 for the NCNC and the AG. Sir Abubakar Tafawa Balewa from the NPC became the country’s prime minister while the NPC and NCNC formed a conservative alliance. Between 1960 and 1963, the formal head of state was Queen Elizabeth II but after Nigeria turned into a Federal Republic in 1963, former Governor General Nnamdi Azikiwe of the NCNC became the first president.
Democracy in the 1960s is short lived
The ruling coalition rapidly outmanoeuvred the AG, whose leader Chief Obafemi Awolowo was imprisoned and charged with treason, while a new pro-government party, the Nigerian National Democratic Party (NNDP) took over in the Yoruba region. It is widely believed that the 1965 disputed elections, characterised by alleged fraud and riots, prepared the ground for the military takeover in 1966, and the Biafra civil war in the years that followed.
The army seizes power in 1966
On 15 Jan 1966, Nigeria experienced its first military coup: the prime minister and the premier ministers of the Hausa and Yoruba-dominated regions were assassinated, and General Johnson Aguiyi-Ironsi seized power. Nigeria would not be ruled by civilians for 13 years. However, Aguiyi-Ironsi failed to ease rising ethnic tensions, and
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his efforts to abolish the federal structure of government led to another coup staged mostly by northern officers who put in power Major General Yakubu Gowon (from a minor ethnic group).
Gowon wins the Biafra war…
The aspiration for self-determination, coupled with anti-Igbo violence in the north precipitated the secession of the region, which became known as the Republic of Biafra led by Lt. Col. Emeka Ojukwu. From 1967 to 1970, the Biafra war devastated the Southeast of Nigeria, with the human cost of the conflict estimated at about 1mn lives. Major General Yakubu Gowon won the Biafra war, but the endemic corruption and continued delays in the promised return to a civilian regime had prepared his fall.
…but is overthrown in 1975. Obasanjo completes the return to democracy
In 1975, General Murtala Mohammed and a group of officers, including Olusegun Obasanjo, overthrew Gowon. The new government started a general crackdown on corruption and indicated that it would complete the transition to a civilian government by Oct 1979. Despite the death of Mohammed in an abortive coup in Feb 1976, his successor Obasanjo, who would become head of state once again in 1999, organised a free and fair election and stepped down.
Shagari’s democratic government (1979-1983) fails to deliver
Shehu Shagari barely won the presidential contest in 1979 with 33.8% of the vote as a candidate of the National Party of Nigeria (NPN), consisting of many former members of the NPC. However, opposition candidates, Obafemi Owalowo and Nnamdi Azikiwe obtained 29.2% and 16.8% of the vote, respectively. Although Shagari’s margin of re-election was higher in the 1983 contest, with 47.3% of the vote (despite accusations of vote rigging), the main weakness of his administration was the lack of a broad national consensus. The extent of political regionalism was striking: each candidate and party had indeed secured nearly all the votes in his/its region of origin. Moreover, Shagari’s regime was unable to revive the Nigerian economy, notably as oil prices declined in the early 1980s, or to tackle corruption while ethnic tensions and clashes resurfaced. The aforementioned elements finally pushed the army to intervene one more time. This historical review is interesting in the sense that it highlights the existence of brief but real democratic experiences in the early 1960s and late 1970s, in contrast with the situation in the rest of Sub-Sahara at the time, even as both civilian regimes failed to deliver.
Muhammadu Buhari regime is ousted in a palace coup
Generals Muhammadu Buhari and Tunde Idiagbon took power in 1983 and implemented very strict anti-corruption policies, initiating a public campaign known as the “War Against Indiscipline”. But this crusade was also concomitant with severe restrictions on civil liberties, such as the right to imprison any opponent indefinitely and without trial, and the criminalisation of dissent against the government in the press. The new regime’s willingness to investigate allegations of corruption in the Ministry of Defence paved the way for a palace coup d’etat in Aug 1985.
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General Ibrahim Babaginda’s regime promises democracy….
The new military leader General Ibrahim Babangida came to power promising to end human rights abuses committed by the previous regime and to hand over power to a civilian president in 1990. In the first years of his rule, Babangida attempted to liberalise the economy and introduced a structural adjustment plan with the support of the IMF. This translated into a reduction in public expenditures, the abolishment of marketing boards in agriculture and market-oriented reforms. Babangida also allowed a devaluation of the artificially overvalued exchange rate. However, in light of popular discontent provoked by the adjustment programme, he progressively shifted to a more fiscally expansionary stance which resulted in slower economic growth and capital flight due to negative real interest rates.
Babangida allowed the restoration of multiparty politics in 1989, but the fairness of the process was seriously constrained by the fact that the two main political parties, the Social Democratic Party (SDP) and National Republican Convention (NRC), were created by the military regime. In the 1992 parliamentary elections, the SDP won the majority in the Senate and House of Representatives, securing 53 and 314 seats vs 38 and 275 for the NRC, respectively.
…and ends the process abruptly
The military regime continued to interfere in the political life of the country by annulling the result of the SDP primary election for the presidential contest scheduled in June 1993. The SDP was then about to nominate Shehu Yar’Adua, the elder brother of the current president, as its candidate. This point is important as Shehu Yar’Adua was the second in command during Obasanjo’s military rule in the late 1970s, and undermines the myth that the current head of state was handpicked by Obasanjo in 2007 to be his successor without ground. The new candidate of the SDP, Moshood Abiola, won the 12 June 1993 presidential election, which was abruptly suspended by the military junta. Following a series of pro-democracy unrests, Babangida resigned and handed his executive powers to a civilian, Ernest Shonekan.
General Abacha instates a dictatorial regime
Shonekan was dismissed within a few months by another officer, General Sani Abacha, who would rule with an iron fist. Abacha’s regime was characterised by extensive human rights abuses, including the hanging of Ogoni activist Ken Saro- Wiwa, and the imprisonment of prominent personalities opposed to his regime, notably Moshood Abiola, who would pass away in jail, and Olusegun Obasanjo. Freedom of press was severely restricted and all political activity banned while the deterioration of the political climate in the country led to its suspension from the Commonwealth. Ironically, Abacha sent Nigerian troops as part of an ECOWAS contingent to restore democracy in Liberia and Sierra Leone. Abacha has also been accused of misappropriating several billions of dollars, of which $1.2bn taken from the Central Bank was finally returned by his family in 2002. Abacha died suddenly from a heart attack in June 1998.
Obasanjo returns to power as a civilian leader
After Abacha’s death, the Provisional Ruling Council of Nigeria - the military junta- selected General Abdulsalami Abubakar as his successor. Abubakar pushed for the adoption of a new constitution and organised a presidential election in which former
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military ruler Olusegun Obasanjo was elected with 62.8% of the vote. Obasanjo stood as the nominated candidate of the People’s Democratic Party (PDP). The PDP became the predominant party in Nigerian politics, especially in the Yoruba Southwest and Muslim north, securing 206 seats out of 360 in the House of Representatives and 59 seats out of 109 in the Senate. Obasanjo was a consensual choice for the PDP leaders given his stature and record while in power in the late 1970s. His first term, however, consisted mostly of restoring Nigeria’s image overseas, and championing debt relief and democratic institutions in Africa, but few structural reforms were undertaken on the domestic front. This period is also characterised by continuing inter-ethnic and regional clashes, translating into thousands of causalities. Obasanjo was nevertheless easily re-elected in the 2003 presidential contest, securing 61.8% of the vote. He drew most of his support from the Southwest but also in the Igbo-dominated Southeast, even as the Northern states supported former military ruler Muhammadu Buhari from the All Nigeria People’s Party (ANPP). The PDP won 54.5% of the vote during the parliamentary elections, 223 seats in the National Assembly and 76 seats in the Senate, vs 96 and 27 for the ANPP, respectively.
Structural reform begins to take place during Obasanjo’s second term
President Obasanjo’s second term was more dynamic in terms of transforming Nigeria. The regime was helped by the sharp rise in oil prices, and the cancellation of a substantial part of the country’s external debt following the deals with the Paris Club in 2005 and the London Club in 2006. The improvement in the macroeconomic environment and acceleration in economic growth were also coupled with the start of an anti-corruption campaign launched by the newly established Economic and Financial Crimes Commission (EFFC). Several ministers, governors and security officers were dismissed or prosecuted while the Senate president was removed from office for receiving bribes. Nigeria posted the most improved ranking among Sub- Sahara African countries – 10 positions – in Transparency International’s Corruption Perceptions Index (CPI) in 2006, and was able to maintain its relative position in the 2007 report.
Figure 4: Corruption perception of Nigeria 2007 Rank 2006 Rank Country 2007 CPI score Confidence range 38 37 Botswana 5.4 4.8 - 6.1 43 44 Malaysia 5.1 4.5 - 5.7 43 51 South Africa 5.1 4.7 - 5.5 69 70 Ghana 3.7 3.5 - 3.9 72 70 Brazil 3.5 3.2 – 4.0 79 70 Saudi Arabia 3.4 2.7-3.9 94 93 Tanzania 3.2 2.9 - 3.4 105 93 Argentina 2.9 2.6 - 3.2 111 105 Uganda 2.8 2.5 - 3.0 118 105 Malawi 2.7 2.4 - 3.0 123 111 Zambia 2.6 2.3 - 2.9 143 130 Indonesia 2.3 2.1 - 2.4 143 121 Russia 2.3 2.1 - 2.6 147 142 Angola 2.2 1.8 - 2.4 147 142 Nigeria 2.2 2.0 - 2.4 150 151 Cote d’Ivoire 2.1 1.7 - 2.6 150 142 Kenya 2.1 19 - 2.3 150 130 Zimbabwe 2.1 1.8 - 2.4 168 156 DRC 2.0 1.8 - 2.2 172 156 Sudan 1.8 1.6 – 1.9 Source: Transparency International, Renaissance Capital estimates
On the downside, Obasanjo’s administration has been criticised for failing to tackle the issue of crumbling infrastructure, in particular in the electricity sector, and for
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alleged irregularities in some of the privatisations taking place at that time. There was rising speculation that Obasanjo would push for an amendment to the constitution that would have allowed him to stand for a third term, an idea shared by many PDP officials, but he finally decided to step down after the National Assembly rejected the possibility of a third term. The last months of his presidency were shaken by a conflict with his vice president, Atiku Abubakar, who was accused of corruption and finally left the PDP to stand in the 2007 presidential contest as an opposition candidate of the Action Congress (AC). A protracted legal battle left him free to contend the election only a few days before the 21 Apr polling date.
Recent political developments
Given Nigeria’s history, by far the majority of investor concerns relate to governance issues and political stability. Chief among these are perceptions of corruption, the civil unrest in the oil-producing Niger Delta region, and uncertainties regarding the pace of reform under the Yar’Adua administration.
Yar’Adua is elected president in Apr 2007
Umaru Musa Yar’Adua, President Obasanjo’s handpicked successor and Shehu Yar’Adua’s brother, Obasanjo’s second in command during his first presidency in the late 1970s, was nominated by the PDP and declared the official winner of the presidential contest held in Apr 2007. According to the Independent National Election Commission (INEC), he secured 69.8% of the vote. Former military head of state Muhammadu Buhari of the ANPP secured 18.7% of the vote, mainly in the northern part of the country, while Atiku Abubakar of the AC gathered a mere 7.9%.
Figure 5: Presidential election results (21 Apr 2007)
Umaru Yar'Adua (PDP), 69.82%
Muhammadu Buhari (ANPP), 18.72%
Other candidates, Atiku Abubakar 1.44% Orji Uzor Kalu Attahiru Bafaraw a (AC), 7.47% (PPA), 1.73% (DPP) , 0.82%
Source: African elections database
This outcome was not surprising, not simply because of the natural incumbency advantage, but also because of the PDP’s efforts in seeking to accommodate sectarian divisions given that Yar’Adua was governor of the Northern State of Katsina.
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Tribunal confirms validity of Yar’Adua election
The Apr 2007 election was regarded as flawed by foreign observers but ultimately endorsed by the international community. The opposition challenged the outcome on the grounds that in many states the official results appeared to have been signed only by residential electoral commissioners and PDP agents. Further, the PDP collated results in 36 states while opposition representatives collated only 11. Other criticisms include that in many regions the elections did not start until as late as 5 pm, allowing fewer people to vote, and that the PDP often obtained more votes than the number of registered voters. However, on 27 Feb 2008, the Presidential Elections Petition Tribunal rejected a petition by Muhammadu Buhari seeking to overturn the validity of the poll. The tribunal also ruled against Atiku Abubakar in a similar case, thereby confirming the validity of Yar’Adua’s election in both cases.
The pre-decision consensus that Yar’Adua would remain president was reinforced by historical evidence; previous attempts to nullify a presidential election victory in court had always failed, including challenges to President Obasanjo’s re-election in 2003. President Yar’Adua demonstrated his confidence that the tribunal would rule in his favour by maintaining an overseas trip during this period, and leaving for China a day after the ruling.
Tackling corruption: President Yar’Adua’s top agenda
Consequently, President Yar’Adua’s political legitimacy and momentum have been boosted by the Tribunal’s decision, a situation that is likely to reinforce the anti- corruption campaign currently under way. Tackling the issue of widespread corruption has always been an objective on top of Yar’Adua’s agenda, a goal that he stated explicitly in various speeches. For example, speaking at the sixth National Seminar on Economic Crimes, organised by the EFCC in Nov 2007, Yar’Adua emphasised corruption as being the greatest obstacle to faster economic growth in Nigeria.
Misappropriation of public funds resulted in multi-billion dollar losses
The impact of corruption on the Nigerian economy has been profound, especially during periods of military rule. The executive director of the Office on Drugs and Crime at the United Nations, Antonio Maria Costa, recently estimated that about $100bn was lost due to bad governance and corruption as large amounts were stolen and invested in foreign banks by previous military leaders. Until the return to a constitutional regime in 1999, Nigeria’s leaders were senior military officers, except for brief periods of civilian rule in 1960-1966 and 1979-1983. Not surprisingly, these periods of poor governance were accompanied by misappropriations of public funds, mismanagement and weak economic performances. There has been some progress in the fight against corruption following the establishment of the EFCC and Independent and Corrupt Practices Commission (ICPC), resulting in more than 400 prosecutions and 92 convictions as of Jan 2008, with assets worth over $5bn recovered, but a lot of effort will be required to further boost the country’s relative accountability standards.
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Transparency International highlights top bribery level
Indeed, the results of the anti-corruption campaign are still limited, as illustrated by Transparency International’s Global Corruption Barometer 2007, released this past December. According to the report, more than 40% of Nigerians admit paying bribes to obtain a service, although most citizens are optimistic about long-term prospects. This leaves Nigeria’s bribery levels second only to Cameroon (79%) in Sub-Sahara Africa and more than three times the world average (13%). The survey specifically suggests that demand for bribes is most widespread in the police and in political parties.
Political governance and accountability standards are nonetheless improving
On the other hand, developments in recent months signal the judiciary’s increased willingness to challenge the status quo. This was highlighted by the decision of a local tribunal in Makurdi, Benue State, to annul the election of Senate President David Mark. A retired army general, former military governor of Niger State, and Minister for Communications under the Babangida regime in the 1980s, Mark became president of the Senate on 6 June 2007. The Election Petitions Tribunal stressed that 139,446 voters in Agagu and Okpokwu local government had been disenfranchised from electing their representative in the constituency and ordered the INEC to hold fresh and credible elections within 60 days of the judgment. Mark is expected to appeal the decision and will remain president of the Senate until all legal channels have been exhausted. This decision was viewed as sensitive because under the constitution, the president of the Senate would become acting head of state should the president and vice-president be incapacitated or impeached.
New speaker of the House of Representatives elected
In a related development, a new House of Representatives speaker, Dimeji Bankole, was elected after the resignation of the former speaker, Patricia Etteh on 30 Oct. Etteh had been accused of irregularities by spending $5mn of public money to buy 12 cars and renovate official residences. Members of the House declined the PDP’s recommendation to elect a new speaker from the same state as Etteh (Bankole is from Ogun State).
The EFCC undertakes an anti-corruption crusade
The EFCC, which is often viewed as the most aggressive body in the anti-corruption campaign, is increasingly targeting high-profile personalities, suggesting that the era of impunity is over. Most recently the EFCC issued an arrest warrant for Lucky Igbinedion, the former governor of Edo State, who is accused of misappropriating more than $24mn. This brings the number of governors charged by the EFCC to eight while many others had been - or are - under investigation. The fear that the removal of the head of the EFCC, Mallam Nuhu Ribadu’s, and his replacement by Ibrahim Abdullahi, as well as the proposed merger of the EFCC with two other anti-corruption bodies, the ICPC and the Code of Conduct Tribunal, could jeopardise the process under way has not materialised.
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On the contrary, the EFCC has started to probe the eight years of President Obasanjo’s administration, and is investigating Health Minister, Adenike Grange, who was forced to resign by President Yar’Adua over alleged corruption charges in late Mar 2008. The EFCC also targets high-profile figures in the private sector such as the former managing director of Wema Bank, Adebisi Omoyeni, for the misappropriation of NGN450mn ($3.8mn). These latest moves by the EFCC seem to be largely supported by President Yar’Adua who has vowed to end the vicious corruption cycle and restore Nigeria’s image overseas.
Government reverses Nitel’s privatisation
From a corporate standpoint, the Federal Government of Nigeria has reversed the privatisation of fixed-line and mobile telecoms company Nitel, of which 51% was sold to Transnational Corporation (Transcorp) for $500mn during the Obasanjo administration. At the time, accusations of cronyism and conflicts of interest arose, given that allies of President Obasanjo were involved in establishing the company. Information Minister John Odey has accused Transcorp of failing to meet investment commitments, and confirmed that the government is now seeking a new controlling shareholder in what has become the second privatisation reversal since Yar’Adua assumed office. This will imply that the government and Transcorp will have to surrender 25% and 29% of their shares in Nitel, out of initial shares of 49% and 51%, respectively.
Given Transcorp’s inability to boost Nitel’s profitability and initiate an upgrade programme for the impaired fixed-line infrastructure, the reversal will be viewed positively by prospective new investors and (subject to what could prove to be a long legal process), may also open the way for private sector players to participate in Nitel’s revival, given its growth potential.
Niger Delta crisis: the costs come to the fore
With the relative progress in eradicating corruption, other major issues hampering Nigeria’s development should not be overlooked. In this regard, the continuing crisis in the Niger Delta region remains a serious concern for the country’s economic potential given its negative impact on foreign investment in the oil sector. Moreover, the government is unable to maximise revenues in a context of elevated oil prices, which broke the $100 barrier. Indeed, a series of militant attacks have forced oil companies to shut down production in the region completely on numerous occasions. The main militant group, the Movement for the Emancipation of the Niger Delta (MEND), claims that Delta populations do not benefit from oil royalties. In turn, the government accuses the rebel groups of being criminals driven by the prospect of personal gains. The cost of these incidents, including sabotage and direct attacks, is estimated at about $60bn since the early 2000s, and will raise speculation about optimistic oil-production levels projected in the 2008 budget. The government anticipates output reaching 2.45mn bpd, more than the 2.3mn bpd quota set by OPEC, and up from an average of 2.1mn bpd produced last year and 1.82mn bpd drafted in the 2007 budget.
Further, Nigerian National Petroleum Corporation (NNPC) Executive Director Chris Ogiemwonyi has estimated that oil output losses due to the crisis in the Niger Delta region amounted to 600,000 bpd in 2007. This represents more than a quarter of
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current oil output. Industry sources report that Nigeria’s oil production is slightly increasing as old fields (for example Shell’s) are progressively restored to full capacity. Tensions are nevertheless likely to remain high given that the MEND recently threatened new attacks on the oil industry, warning that it would trigger “an economic tsunami” in the world oil markets. Therefore, a peace deal in the Niger Delta remains a priority for President Yar’Adua and is vital to boosting growth prospects for this year.
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The real economy
Rising oil prices coupled with a relative improvement in governance in the last decade have prepared the way for a sustained economic boom. Consequently, we expect real GDP growth to reach 9.1% in 2008. In this chapter, we also review the fundamentals of Nigeria’s economic story, which is best described by its strong external position, large foreign reserves and debt sustainability.
Figure 6 : Oil prices have skyrocketed since 2004 Bonny Light prices ($/bbl) Oil rev enue ($mn/day )
110 350 100 300 90 250 80 70 200 60 150 50
Bonny Light prices 100 40 Oil revenue ($mn/bpd) 30 50 20 0 2000 2001 2002 2003 2004 2005 2006 2008*
*March data Source: OPEC
Economic growth and output
Long-run output dynamics
Figure 7 : Real GDP is rising
15
10
5 % 0
-5
-10 1980 1985 1990 1995 2000 2005 2010E
Source: IMF
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Figure 8: GDP spending allocation in Nigeria Priv ate consumption Exports-Imports Gov ernment consumption Inv estment Sav ings
100%
80%
60%
40%
20%
0%
-20% 1960 1970 1980 1990 2000
Source: IMF
Short-run dynamics, and medium-term outlook
Figure 9: Latest GDP spending allocation in Nigeria
Breakdow n of national accounts (% GDP, 2005) Household consumption ex penditures, Gross fix ed capital 60.70% formation, 10.30%
Gov ernment Ex ports-Imports of consumption goods and ex penditures, serv ices, 23.06% 5.93%
Source: IMF
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Figure 10: Economic assumptions 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E Nominal GDP, $bn 42.0 44.3 43.6 56.7 88.9 114.5 148.7 166.4 217.0 254.5 294.4 Nominal GDP, growth 5.4% 5.3% -1.6% 30.1% 56.9% 28.8% 29.8% 11.9% 30.4% 17.2% 15.7% Nominal GDP market prices, NGNbn 4,676 5,339 5,632 7,533 11,674 14,735 18,710 20,845 25,141 28,150 31,200 Nominal GDP market prices, growth 35.9% 14.2% 5.5% 33.7% 55.0% 26.2% 27.0% 11.4% 20.6% 11.9% 10.8% Real GDP growth 5.4% 3.1% 1.5% 10.7% 6.0% 7.2% 5.6% 6.3% 9.1% 8.3% 7.0% Prime interest rate, MPR (end of period, %) 14.0 20.5 16.5 15.0 15.0 13.0 10.0 9.5 10.5 11 10 Inflation (average, %) 6.9 18.0 13.7 14.0 15.0 17.8 8.3 5.3 8.6 9.2 8.3 Inflation (end of period, %) 14.5 16.5 12.2 23.8 10.1 11.6 8.5 6.0 8.5 8.7 7.9 Nominal exchange rate (NGN/$), end of period 110.0 119.5 126.5 139.6 132.1 130.4 128.8 117.9 111.5 109.3 105.7 Nominal exchange rate (NGN/$), average period 111.2 120.6 129.2 132.9 131.3 128.7 125.8 125.3 114.7 108.8 107.0 Population 128 132 135 139 143 146 150 154 157 161 165 Population growth, % 2.7 2.7 2.7 2.7 2.7 2.5 2.5 2.5 2.5 2.4 2.4 GDP per capita current, $ 328 337 322 408 623 783 992 1,083 1,378 1,580 1,784 GDP per capita growth, % 19.2% 2.5% -4.2% 26.6% 52.7% 25.7% 26.7% 9.2% 27.2% 14.7% 12.9% Source: IMF, Renaissance Capital estimates
Figure 11: Nigeria vs Sub-Sahara Africa real GDP growth
Nigeria Sub-Sahara Africa
12
10
8
% 6
4
2
0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IMF, Renaissance Capital estimates
Economic assumptions
Rising demand for natural resources in recent years, concomitant with a sharp improvement in the terms of trade, has translated into a strong upturn in GDP growth in sub-Saharan Africa. As a result, the IMF forecasts that the region will grow at 6.6% in 2008, from 6.8% in 2007 and 6.4% in 2006, as new production facilities are expected to become operational in oil-exporting countries. In this category, Nigeria’s growth rate is projected to reach 9.1% vs an average expansion of 5.4% for oil- importing countries.
Nigeria will easily outperform global growth, which is likely to average 4%, during 2008-2010. We estimate that real GDP expansion will remain strong at an average of 8% in the next three years. In any case, Nigeria is not very sensitive to the world economy, given that the only two major linkages are the energy and financial sectors. On the first point, the economy has been more vulnerable in recent years to production shutdowns than to volatility in international prices. On the second point, Nigerian banks have withstood the turmoil in the credit markets and have been able to borrow abroad on reasonable terms.
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The fundamentals support a sustained appreciation of the naira to about NGN115.5:$1 by the end of 2008, and further to NGN109.3:$1 and NGN105.7:$1 in the two following years. This helps to explain the rapid expected rise in GDP in dollar terms to $217bn by YE08, from $166bn last year. We project GDP to be close to $300bn by 2010, the equivalent of a 2x increase in four years, or a compound growth average rate of about 19%. This is significant even by the standards of fast- developing emerging markets. GDP per capita will have increased more than 5x over 10 years, including a rise to $1,784 in 2010 from $1,083 in 2007.
The ability of the central bank to contain inflation should improve over time, if as it hopes, supply-side conditions in the agricultural sector improve. This dynamic may offset liquidity-driven inflation, which we expect to stabilise at 8.3% in 2010, after rising to 8.6% and 9.2% in 2008 and 2009, respectively. Nonetheless, we anticipate a 50 bpts monetary tightening to 11% in 2009, before reductions in the Monetary Policy Rate (MPR) to 10% in 2010.
Recent performances: GDP growth has been robust
GDP averaged 6.3% during 2007, thanks to better-than-expected performances in the final two quarters. This compares with a growth rate of 5.6% during 2006. GDP growth picked up to 7.6% in 4Q from 6.1% in 3Q, mostly reflecting sustained expansion in the non-oil sector, which now accounts for 81.9% of aggregate output (vs 77.6% two years earlier) at constant 1990 prices.
Non-oil output
Growth has increasingly been driven by the non-oil sector in recent years, especially agriculture, which was neglected before the return to constitutional normality in 1999. The latest IMF estimates suggest that non-oil GDP will grow at an average of 8.5% in 2008-2010 vs oil sector growth of 6.3%. Overall, non-oil GDP growth reached 9.6% in 2007 vs a 5.6% contraction for oil GDP, while in 2H07 non-oil output expanded 11.0% in 4Q, up from 9.5% in 3Q, driven both by agriculture and manufacturing. Opportunities remain to further bolster food production, particularly in areas where large portions of demand are met by imports.
Figure 12: Real oil vs non-oil GDP growth
Real oil GDP growth Real non oil-GDP growth 30
25
20
15
% 10
5
0
-5
-10 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IMF
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Before it became a major oil producer, Nigeria was a formidable agricultural producer. One legacy of the oil-curse years was mismanagement and neglect of this sector. Reflecting the rise in soft commodity prices, as well as better investment-capital access, farming is witnessing renewed attention. Agriculture is unlikely to achieve the status it once had and there are many industries competing for financial resources. However, it is certainly a sector to watch, given the vivid exporting successes of many neighbouring economies. Capital investment remains the main constraint, given the labour intensity of the industry: agriculture, hunting and fishing account for 59% of the working force (not including those employed in the informal sector).
Figure 13: Sectoral contribution to GDP (%, 2006) Sectoral contribution to GDP (%, 2006)
Oil and gas, Agriculture , 21.85% 41.73% Distributiv e trade, 14.95%
Telecom & postal Other sectors, services, 9.92% 1.83% Building & Finance & construction, insurance, Manufacturing, Solid Minerals, 1.62% 3.90% 3.91% 0.28%
Source: National Bureau of Statistics
Figure 14: Employment by sector (mn people; 2005)
Mining and quarry ing 0.1 Real estate, renting and business activ ities 0.1 Hotels and restaurants 0.1 Comm., repairs of auto and domestic art 0.1 Building and construction 0.3 Health and social w ork 0.4 Finance intermediation and insurance 0.4 Transport, storage and communication 0.5 Manufacturing industries 1.2 Others 3.8 Public Administration and defense 6.5 Education 12.2 Agriculture, hunting, forestry and fishing 37.5 Total w orking population 63.9
0 10203040506070
Source: National Bureau of Statistics
Oil-sector output and constraints
Oil GDP growth is estimated by the IMF to reach 9% in 2008, after contracting 4.5% and 5.6% in 2006 and 2007, respectively. Nigeria is Sub-Saharan Africa’s largest oil exporter, at about 2.1mn bpd, although production levels are subject to large swings.
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However, up to 1mn bpd remains untapped because of militant attacks, poor infrastructure and operational issues. The government anticipates that output will reach 2.45mn bpd in 2008. Meanwhile, Oil Minister Odein Ajumogobia recently outlined the Federal Government’s plans to eventually invest $15-20bn per year in energy exploration and production. One should however assess these figures with caution as this is not the first time that such flamboyant objectives have been announced, without any concrete follow up.
Figure 15: OPEC crude oil output and revenue, Feb 2008 Output, '000 bbls per day Revenue, $mn per day Revenue, $bn per annum KSA 9,056 728.6 242.2 Iran 3,866 342.2 124.9 UAE 2,582 235.6 83.6 Venezuela 2,392 216.8 79.1 Kuwait 2,550 218.3 79.7 Nigeria 2,062 199.8 73.0 Iraq 2,328 211.0 77.0 Libya 1,741 157.8 57.6 Angola 1,892 171.5 62.6 Algeria 1,412 128.0 46.7 Indonesia 869 78.7 28.7 Qatar 842 76.3 27.8 Source: OPEC
Despite this optimistic outlook, the sector remains under-funded. Further investments could help to maximise output from existing fields, as well as bring new production on stream more quickly. Another contention is that the federal government is slow to pay its share of commitments in joint venture operations with major foreign companies such as Shell, ExxonMobil, Chevron, Total, Texaco and Agip. The authorities have also indicated they will borrow $3.8bn of incremental capital from international and local banks to fulfil their obligations, although not at the fully sovereign level.
Vision 2020 programme forecasts $900bn GDP
President Yar’Adua predicted Nigeria’s GDP could reach $900bn by 2020, up from $166 in 2007. This projection assumes average annual growth of about 15%, an expansion that would also facilitate meeting the millennium development goals (MDG). However, this is in contrast with last year’s 6.3% growth rate and even this year’s ambitious 9.1% target. Under the government’s ambitious Vision 2020 strategy, Nigeria is envisaged to become the leading industrialised nation in Africa, overtaking South Africa. The programme intends to accelerate the diversification of the economy, with the share of oil and gas to GDP expected to decline significantly. Minister of State for Petroleum Dein Ajumogobia has also predicted that oil output could be raised to 4mn bpd by 2010, twice the current level of 2.1mn bpd. For these ambitious targets to be achieved, the government’s reform plans will have to be stepped up a gear.
Further expansion is conditional on infrastructure and stability
A further acceleration in growth remains conditional on finding a political settlement to the crisis in the oil producing Niger Delta region, where a quarter of production was shut down last year. Rising investments in infrastructure will support growth over the next few years, as will consumer spending and the expansion of the financial industry. Most major infrastructure projects are in the early stages and therefore will boost GDP for the foreseeable future. It will take a few more years at the outset to gauge
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the quality of these investments and the extent to which they contribute to productivity growth and improvements in basic services, over the medium to longer term.
The external sector
Nigeria enjoys a modest current-account surplus estimated at 0.7% of GDP for 2007 and 6.6% of GDP for 2008. The latest actual annual data (2006) suggest exports amounted to $45.1bn, of which oil exports stood at $43.2bn, or 96% of the total. Imports totalled $21.8bn, leaving a trade surplus of $23.3bn, or 16% of GDP. Preliminary indications for 2007 indicate that while the non-oil export sector has gained some ground, with $1.4bn of exports, its share remains insignificant. Nevertheless, Nigeria could eventually benefit from the Africa Growth and Opportunity Act (AGOA) provisions, which eliminates or reduces quotas and duties on products such as leather, cocoa, wood, spices, fruits and vegetables.
Figure 16: Nigeria enjoys a current account surplus
Current account balance (% GDP)
Nigeria Sub-Sahara Africa 13
8
3 % -2
-7
-12 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IMF
The trade balance is likely to register a notable improvement over the medium term, given elevated oil prices. Based on the latest IMF estimates, exports could reach $75bn this year and imports $35bn.
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Figure 17: The trade balance is expected to rise sharply. Ex ports of merchandise (% GDP) Imports of merchandise (% GDP) 100
80
60
$bn 40
20
0 2000 2001 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E
Source: IMF
The US is the largest importer of Nigerian crude, making it the number one trade partner. Total bilateral trade between the countries reached $35.6bn during 2007, of which $32.8bn consisted of oil exports from Nigeria. In the event that a US slowdown leads to a reduction in oil-import demand, exports could be diverted to other countries, given the high quality of the Bonny Light benchmark, and in light of the substantial overall demand from the rapidly expanding East Asian economies.
Figure 18: Main destinations of exports
Others 20% France 5%
Brazil 7% US Spain 58% 10%
Source: EIU
Figure 19: Main sources of imports.
Other 69%
UK China 6% Nertherlands US 11% 6% 8%
Source: EIU
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Foreign direct investment
Foreign direct investment (FDI) has accelerated sharply in recent years. The Nigerian Investment Promotion Commission (NIPC) estimates cumulative FDI at $33bn between 1999 and 2007, of which $5.8bn was received in 2007. The NIPC acknowledges that this substantial rise in FDI has mainly reached the oil and gas and telecoms sectors, though prospects for other sectors are improving. According to the United Nations Conference on Trade and Development (UNCTAD), Nigeria accounted for 44% of FDI flows into the Sub-Sahara region in 2006. These investment figures are likely to remain strong in upcoming years, reflecting diversification of the energy sector; tax incentives to downstream petroleum projects to produce higher-value exports; and opportunities to fund infrastructure projects, to name but a few factors.
Figure 20: Net inflows of foreign domestic investment (FDI)
6
5
4
3 $bn 2
1
0 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF,NIPS, UNCTAD, Renaissance Capital estimates
With regard to energy-sector diversification and potential, untapped natural gas reserves are estimated at 183.9 tcf, several times the equivalent of untapped oil reserves. The paradox is that the domestic market is not adequately supplied. The investment gap in the gas sector has led the Nigerian government to prepare for the introduction of a more market-friendly framework for private and foreign capital, via incentives such as tax holidays, duty exemption on imported equipment and capital and investment allowances. FDI in the gas sector is likely to originate from various investors, including non-traditional sources. For example, the recent investment by UAE-based Dana Energy confirms the rising interest of Middle East liquefied natural gas (LNG) companies. Gazprom, the Russian gas company, has also announced plans to invest $7bn in the near future as it hopes to catch up with other major companies which have been present in Africa for several decades. Nigerian sources cite Gazprom as intending to export gas to western countries through Nigeria’s LNG plant or via a planned Trans-Sahara pipeline between Nigeria and Algeria.
This trend is also visible in other resource sectors. Russian aluminium company RUSAL announced that it would restart production at the Alscon aluminium smelter plant in southeast Nigeria early in 2008. This follows its purchase of Alscon in 2006. The company, which had an initial capacity of 193,000 tonnes per annum, fell into bankruptcy in 1999, leading the government to privatise it. Last year, RUSAL won the tender to acquire a 77.5% stake for $250mn and intends to invest a further $150mn in the future.
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Meanwhile, Finance Minister Shamsuddeen Usman recently announced that the Chinese export-credit agency Sinosure has concluded arrangements to provide up to $50bn of political risk insurance on infrastructure-related projects in Nigeria in the next six years. Usman added that a delegation of the China National Oil Corporation would visit Nigeria in April to assess investment opportunities in the oil industry, in particular in refineries and petrochemicals. We think that the amounts projected are overstated, as they are unrealistically high. Nonetheless, they confirm China’s rising interest in Nigerian energy resources.
External debt
A series of debt buybacks has left Nigeria, as a sovereign borrower, virtually free of debt. There are no outstanding debts to the IMF and only $2.5bn to other multilateral institutions, primarily the African Development Bank (AfDB). The Institute for International Finance estimated total sovereign external debt at $4.2bn, as of YE07, or a modest 3% of GDP, while the IMF has more conservative figures of $3.3bn and $3.4bn for 2007 and 2008, respectively. Paris Club claims were once as high as $30.8bn dollars, but subsequent to the 2005 buyback at (effectively) 30% of par, they are now close to zero. Promissory Notes and Brady bonds (restructured debt to private creditors) have been paid back or called, leaving only remnant oil warrants as tradable fixed income instruments. The sovereign is now a net creditor.
In light of price developments in the energy markets and the limited capacity to increase public spending, the sovereign’s position as a net external creditor was inevitable, in retrospect. Nevertheless, then-incumbent Ministry of Finance officials deserve credit for the following: 1) negotiating the discounted buyback with the Paris Club at an advantageous time and price (not long after repurchasing Brady bonds at market prices); 2) setting in motion the public financial management improvements that caused international reserves to accumulate more quickly; and 3) encouraging the IMF to introduce the Policy Support Instrument, which would meet the Paris Club’s requirements for a debt deal to coincide with an IMF programme without imposing stringent conditionality. Previous Nigerian governments had lobbied official creditors heavily, but without any success.
However, the headline figures understate total debt, for a number of reasons. First, they measure what could be considered core sovereign debt and exclude the debt of state-owned companies, delayed payments of cash calls on oil joint ventures and project guarantees. In addition, as time goes on, the government is likely to increase its leverage, primarily via the syndicated loan and private-placement market, to finance infrastructure projects. A sizeable portion of the local Treasury bill and bond market is held by foreign investors and according to many international accounting conventions, this should be classified as external debt.
Meanwhile, the sovereign and sovereign-guaranteed debt tells only part of the story, because commercial banks have been borrowing heavily in recent years. There are only two publicly traded bank eurobonds, with an outstanding value of $525mn, but the banks have been borrowing extensively through private placements, and guaranteeing non-banking entities’ debts. There are no publicly available statistics on these debts, but we believe they are approximately half the total sovereign external debt. Finally, the state governments have begun to tap the capital markets more
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aggressively and as the markets mature, it is likely that foreign investors will also become significant creditors to these entities.
Figure 21: External debt has declined sharply 40 35 30 25 20 15
External debt ($bn) 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IMF
Foreign reserves
Foreign reserves hit $60bn in March
After stagnating through the summer of 2007, foreign reserves have begun to rise rapidly. The accumulation has been especially steep in the past few months, as political risk has waned, portfolio inflows have accelerated and, last but not least, crude oil prices have surpassed the $100/bbl threshold. The central bank estimates that reserves reached $60bn by the end of Mar 2008, from $51.3bn at YE07, rising $8.7bn, or approximately two years of merchandise imports, in 1Q. Reserves are likely to continue rising rapidly this year, as previous one-off drains (Paris Club and Brady bond repurchases and budget-revenue shortfalls due to lower oil production) have mostly come to an end. This has created favourable economic conditions for the naira's current-account convertibility, but less-than-attractive conditions for capital- account convertibility, as the latter will reduce the central bank’s monetary policy flexibility.
Figure 22: Foreign reserves are rising rapidly Foreign reserv es, $bn (R-ax is) Import cov er of goods and serv ices, months (L-ax is) 19.2 120 21.0 16.6 19.0 100 14.1 17.0 80 15.0 11.2 13.0 60 10.1 11.0 7.8 8.3 40 6.7 9.0 5.8 5.8 7.0 20 3.6 5.0 0 3.0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IMF
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Monetary policy and exchange rates
Several factors have driven inflation dynamics in recent years: the revival of the agricultural sector (which has translated into lower food prices at the expense of excessive price volatility); excess liquidity associated with dollar inflows; rising domestic credit; and the modest appreciation of the naira.
Inflation dynamics
Figure 23 : Nigeria’s 12-month moving average inflation remains relatively low
14 Latest 12-month mov ing av erage inflation 12 10 8
% 6 4 2 0 Kenya Ghana Angola Nigeria Malawi Zambia Uganda Namibia Mauritius Tanzania Botswana South Africa Cote d'Ivoire Mozambique
Source: Renaissance Capital estimates, IMF, local sources
Nigeria's inflation remains low by regional standards: 8% YoY as of Feb 2008. The 12-month average is even lower, at 5.5%. This stands in sharp contrast with the inflation history of the 1990s and even in the 2000s, when consumer prices were often in double digits (17.6% in 2006). We expect inflation to accelerate slightly to 8.6% in 2008 and 9.2% in 2009, thereby remaining in line with the upward trend registered in recent months. If, as expected, the CBN introduces an inflation-targeting regime sometime in 2009, it is likely to set a relatively high target in the first phase of the regime.
Food prices and headline inflation
The rapid recovery of the agricultural sector implies reduced sensitivity to global food prices, notable in a country where food represents 64% of the CPI basket. Food inflation declined from a record high of 35.8% in Aug 2005 into negative territory in 3Q07, including a record low of -1.2% in August. As a result, inflation was relatively well contained in 2007, at 5.4%. However, food inflation spiked in the final quarter of 2007, due to drought in the northern part of the country, precipitating a rise in headline inflation to 6.6% in December and 8.6% in January 2008. Food inflation reached 12.6% in January, from 8.2% in December and 3.2% in November. The National Bureau of Statistics’ (NBS) latest estimates suggest that food inflationary pressures eased slightly in February, and overall inflation declined to 8%. This decline may have been helped by the government‘s decision to sell food from its reserve stock at half the market price, in some locations, during the month.
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Figure 24: Headline and food inflation are strongly correlated Food inflation Headline inflation 40
30
20 % 10
0
-10 Jul-04 Jul-05 Jul-06 Jul-07 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Nov-04 Nov-05 Nov-06 Nov-07 May-04 May-05 May-06 May-07 Source: CBN, NBS, IMF
Domestic credit
Credit to the private sector accelerated 96% YoY in 4Q07 to stand at NGN4.89trn ($41.4bn) by YE07, from NGN2.5trn ($20.7bn) in Dec 2006. Quarterly growth rates (not annualised) were 19% in 4Q, 20.6% in 3Q, 14.8% in 2Q and 11.6% in 1Q07. The banking-consolidation process undertaken in 2005 has resulted in the number of banks declining to 24 in 2008 from 89 initially, thereby improving the banks’ balance sheets and their ability to finance the economy’s needs. Nigerian banks have raised $8.8bn worth of equity capital in the past year, and we envisage a pipeline of a further $6.6bn in 1H08, bringing the total expected capital raised to $15.4bn. Although the private-sector credit extension of $20.7bn equivalent sounds alarming at first glance, the 2007 multiple to new equity is only 2.5x and if as expected, equity capital raisings continue, lending growth should stay reasonable. While a detailed breakdown of credit allocation has not yet been provided by the CBN, we understand from discussions with banking participants that lending to high-end blue chips and medium-sized corporates remains very robust, with retail lending also picking up. This can be seen particularly in asset-backed financing in the form of cars, white goods and home loans.
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Figure 25: Domestic credit to private sector rose 96% in 2007 Domestic credit to priv ate sector, NGNmn R-ax is Grow th rate in domestic credit to priv ate sector, % 6,000 120%
5,000 100%
4,000 80%
3,000 60%
2,000 40%
1,000 20%
0 0% 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF, CBN
Interest rates
In Oct 2007, the MPR was raised 100 bpts to 9% and the interest rate corridor of 250 bpts on either side of the main rate was eliminated. This was an important notification that the central bank would try to manage money markets rates more tightly and that the MPR would adopt more of a signalling impact. The rate was subsequently hiked to 9.5% on 3 Dec 2007 and 10% on 1 Apr 2008. In a statement, the central bank commented both that inflation remained too high (in spite of a sizable drop between January and February) and that leading indicators of prices were disconcerting. Two of the principal risks, in its view, are public spending and overheated asset markets. On a preliminary basis, we expect no change in the June Monetary Policy Committee (MPC) meeting, but that the committee will retain its tightening bias.
The narrowing of the MPR model from a corridor to a spot concept could be seen as an interim move, ahead of the expected launch of inflation targeting next year. This is a further step in the modernisation of the financial economy, following other liberalisations of the money, foreign exchange and capital markets.
Figure 26: Interest rates dynamics show both successive cuts since 2003 and a tightening in recent months.
% 25 MPR and antecedents 20
15
10
5
0 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: IMF, CBN
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In the meantime, corporate lending rates have continued to decline, due to accelerated competition within the banking sector and the arrival of foreign investors, some of whom have attempted to disintermediate the banks. This will serve to further complicate the central bank’s policy flexibility.
Figure 27: Lending and deposit rates have declined.
% Deposite rate Lending rates 30
25
20
15
10
5 2000 2001 2002 2003 2004 2005 2006 2007
Source: IMF
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Fiscal policy
Exchange rate
The CBN has fostered tighter monetary conditions via the exchange rate, which will serve to contain relative price pressures, albeit modestly. Some perspective is needed in making this case, as naira appreciation is much more a weak-dollar story given the naira's 6% annual-strengthening trend vs the dollar but 2% weakening vs the euro. Moreover, when compared with the performance of other currencies, the naira’s performance has been rather tame.
Figure 28: Real effective exchange rate appreciation in Nigeria
200 180 Base: 2000 = 100 160 140 120 100 80 60 40 20 0 Kenya Ghana Angola Nigeria Malawi Zambia Uganda Namibia Mauritius Tanzania Botswana Zimbabwe South Africa Cote d'Ivoire Mozambique Source: IMF
The naira’s appreciation has ground to a halt in the past six weeks, in spite of a statement from the central bank implying it would seek the opposite. The IMF and others have urged a more rapid appreciation, but the authorities have preferred a more gradual stance, for a variety of reasons. These include a perception that a more rapid rise could be destabilising. In addition, officials are concerned about the potential negative-translation impact on asset holdings, which are mostly dollar denominated. The IMF has suggested a de facto compromise, in which major infrastructure projects would have high-import content. The concession element stems from well-connected industrial companies’ natural resistance in the face of increased competition on lucrative domestic projects. However, the compromise plan would address the excessive liquidity that concerns the central bank, by recycling the petrocurrency surpluses without the dollars entering the country (practically speaking).
On balance, macroeconomic fundamentals support further appreciation and officials tacitly acknowledge this by pencilling in stronger forecasts in budget statements. Our view is that the naira should reach NGN111.5:$1 by the end of 2008 and NGN106:$1 a year later. This represents a 6% appreciation against the dollar in nominal terms or about 10% in real terms. Given the unpredictability of inflation, as outlined below, the real exchange rate forecast is little more than a rough guide.
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Figure 29: The naira has appreciated vs the dollar, not the euro. Naira/$ Naira/Euro 200
180
160
140
120
100
80
60 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: Bloomberg
Further thoughts on the Naira redenomination
It is old news now, but 2H07 was characterised by confusion over economic policy decision-making. The most controversial item was the central bank’s decision to re- denominate the naira (removing two zeros). This was suddenly reversed by President Yar’Adua on the grounds that currency denomination issues were the exclusive prerogative of the president. Finance Minister Usman later commented that cost-benefit analysis easily favoured the status quo, especially when spending priorities had been factored in. Although the naira re-denomination “crisis” has blown over, most observers accept that the political influence of CBN Governor Soludo has declined as a result of the ill-fated policy gambit.
The emergence of pension funds: a sign of financial deepening
The Pension Reform Act, adopted in 2004 but often overlooked, is bearing results. Data from the National Pensions Commission (Pen-com) show that the capitalisation of funds managed by licensed administrators in Nigeria reached NGN815bn ($6.8bn) by YE07. Of this, NGN600bn ($5.1bn) represents legacy funds and NGN215 ($1.8bn) were new inflows in the system. According to Pen-com, the total number of registered employees in both the public and private sectors stands at above 3mn people, with the private sector accounting for 28% of total contributions. This implies that compliance with the Pension Reform Act has been minimal, given the ratio of contributors to the population working in the formal sector, and the size of the informal sector. However, this also means that the growth potential of this under-capitalised sector, accounting for only 5.3% of GDP, is significant. Among other areas, we expect pension funds to help bridge the infrastructural gap in Nigeria and other African countries, as securing longer-tenor financing is famously difficult in these economies.
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The claim that Nigeria wasted 30 years of oil revenue in the post-independence period would certainly not be an over-exaggeration. On the other hand, one should not understate the degree of structural reforms undertaken in recent years, notably in terms of more efficient oil-revenue management.
Fiscal consolidation
To further progress in consolidating fiscal policy, the government has introduced a cap on public spending, and plans to gradually phase out subsidies, notably of domestic petroleum prices. This will also help to remove major price distortions. These fiscal reforms will partly ensure that government spending produces less excess demand. In reality, though, the government is merely shifting its spending bias in favour of infrastructure. Some of the change in priorities is taking place through better surveillance of current spending. A good example is a 66,000-person reduction of civil servants, notably ‘ghost’ workers, from the payroll, which helped to finance a 15% wage increase for other civil servants. Another example of the consolidation is a willingness to allocate funding to settling contingent liabilities, such as unpaid bills to contractors.
Figure 30 highlights the fiscal surpluses achieved since 2004. Note that Nigeria is one of the few non-aid dependant countries in Sub-Saharan Africa.
Figure 30: The fiscal balance should remain positive.
Overall fiscal balance (% GDP) 10 8 6
4
% 2 0 -2
-4 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008E 20090EE201
Source: IMF, Global Insight
The government has initiated more transparent guidelines for oil revenues. The constitution stipulates the three tiers of government (federal, states and local) receive revenue as follows: oil-producing states collect 13% upfront as “derivation grants,” while the remaining 87% is allocated with 52.7% for the federal government; 26.7% for states and 20.6% for local governments.
32 Renaissance Capital Nigeria 17 April 2008
The crude oil benchmark and Excess Crude Account (ECA)
The establishment of a crude-oil benchmark in 2004 was an important innovation, creating the right environment to save surplus oil income when prices are high and avoid boom-bust cycles. Proceeds above the crude-oil benchmark, currently $59/bbl, are channelled into a reserve fund known as the Excess Crude Account (ECA). The ECA stands at $13bn (after a $4bn disbursement to states which financed the 2005 repayments to the Paris Club).
While an important reason for setting up the ECA was to avoid pro-cyclical fiscal policies, by capping spending, the ECA has also become a means of funding future infrastructure projects in sectors such as power, oil and gas, and transport.
Tax base bias
In order to contain its reliance on oil revenues, President Yar’Adua’s government has started to discuss a strategy aimed at boosting non-oil revenues. The dilemma consists of broadening the tax base without undermining the growth potential of the newly emerging non-oil sector. Nevertheless, we view Nigeria’s tax regime as similar to many other countries. For example, based on the World Bank Business Report, the corporate income-tax rate stands at 19.4% vs an average of 24.4% in Sub- Sahara Africa and 20.0% in the OECD. The same report suggests that Nigeria does well in terms of aggregate tax rate, at 29.9%: it is ranked 25th out of 138 countries in the survey. The National Tax Strategy goes beyond a simple broadening of the non- oil tax base by addressing the efficiency of the tax-collection system, and the recurrent issue of double-taxation.
Figure 31 : Total taxes on business, selected African countries Total Total Corporate Labour Other
tax rank tax rate, % income tax, % tax, % tax, % Zambia 6 16.1 1.7 10.4 4 Botswana 8 17.2 17 0 0.2 Mauritius 12 21.7 10.8 3.6 7.3 Namibia 19 26.5 18.5 0 8 Nigeria 25 29.9 19.4 9.7 0.7 Malawi 32 32.2 30.4 1.1 0.7 Uganda 33 32.3 15.7 11.3 5.3 Ghana 38 32.9 18.4 14.1 0.4 Rwanda 41 33.8 20.2 5.7 7.9 Mozambique 43 34.3 27.7 4.5 2.1 Swaziland 57 36.6 28.1 4 4.5 South Africa 62 37.1 24.2 4.3 8.6 Gabon 91 44.2 19.7 22.7 1.8 Tanzania 93 44.3 20.2 18 6.1 Cote d'Ivoire 98 45.4 9.7 20.1 15.7 Kenya 125 50.9 32.5 6.8 11.6 Zimbabwe 136 53 9.3 4.7 39 Angola 138 53.2 24.6 9 19.5 Sources: PricewaterhouseCoopers, World Bank
33 17 April 2008 Nigeria Renaissance Capital
Controversy over the 2008 budget
The impasse in adopting the 2008 budget in 1Q08 following the president’s decision to return the revised 2008 document to parliament, is worth a mention. Yar' Adua rejected the initial draft on the grounds that a planned 21% YoY rise in government spending, including a 78% increase in the national assembly’s expenditures, would be unacceptable.
The budget presented by the government on 8 Nov amounted to NGN2.53trn ($21.6bn), but parliament inflated the draft to NGN2.9trn ($24.8bn), leading to the first presidential veto. In its latest version, the revised budget was reduced to NGN2.75trn ($23.5bn), but the head of state remained critical of the lack of detailed breakdown of planned expenditures, in what could be perceived as an attempt to improve fiscal responsibility and governance standards in the country.
From a macroeconomic perspective, Yar’Adua’s objections were reinforced by the recent inflation surge. Moreover, the risk of further inflation acceleration could potentially be fuelled by the Senate’s decision to increase the crude-oil benchmark price to $59/bbl, which would inject extra liquidity into the economy. The implementation of a pro-cyclical fiscal stance would have raised doubts over the ability of the authorities to contain consumer prices this year, especially a few months ahead of the introduction of inflation targeting.
Nevertheless, one should not over-dramatise these developments given that a consensual decision was reached which allowed the budget to be signed on 14 Apr, even as this confirms that important segments of the political elite may indeed desire a more expansionary policy stance.
34 Renaissance Capital Nigeria 17 April 2008
Concluding remarks
The recent steady increase in oil output (with Shell restarting production of 200,000 bpd in the Niger Delta region), could pave the way for a rise in GDP growth to about 9.1% in 2008. However, this positive outlook is dependent on avoiding further militant attacks on oil installations (a series of attacks led to almost a quarter of output being halted last year) .
The longer-term outlook will be constrained by infrastructural under-development, especially in electricity (which translates into an extra cost burden on business), as well ageing infrastructure, particularly in the oil sector. Recurring drops in electricity generation and distribution are a reminder of the scale of power infrastructure under- development. Recent statistics published by the International Centre for Energy, Environment and Development (ICEED) suggest that 57% of the Nigerian population does not have access to electricity. This is despite more than $10bn spent by the federal government in recent years to upgrade the sector’s infrastructure. With regard to natural gas, the huge reserves remain largely untapped even as global demand is rising fast. The push to overcome this situation will require massive foreign investment, estimated to $34bn1 per annum over the next decade, of which a significant part will consist of public-private partnerships in power, energy and transport projects in particular.
One should not, however, overshadow the impressive progress made in the past decade, in terms of governance and macroeconomic stabilisation. Ten years ago, Nigeria was ruled by a military regime which suppressed basic rights while corruption was at its climax. Since 1999, the political and institutional framework has progressively matured; three presidential elections have been held while an anti-corruption campaign has targeted transgressors, regardless of rank. This represents a qualitative step forward, notably in light of the evident relationship between institutional quality and economic development.
President Yar’Adua enjoys the necessary momentum to undertake a wide privatisation programme, and create an attractive environment for private-sector- driven investments in infrastructure and credit-constrained sectors. The realisation of the presidential programme known as Vision 2020-20 which aims at transforming Nigeria into one of the top 20 global economies by 2020 will be helped by high oil prices, as well as the rising demand for crude-oil substitutes such as LNG. Moreover, the improvement in macroeconomic indicators – high reserves, a strong fiscal position, and low sovereign debt – will sustain economic growth in upcoming years.
1 This is the theoretical annual investment requirement, rather than the amount which could physically be raised or spent, to bring the infrastructure to a certain level of development.
35 17 April 2008 Nigeria Renaissance Capital
The gallery
Figure 32: Agricultural output is rising vs. oil output in GDP. Figure 33: Investment as well as exports are booming.
Agriculture , Sectoral contribution to GDP (%, 2006) Oil and gas, Breakdow n of national accounts (% GDP, 2005) 41.73% 21.85% Gross fix ed Household capital consumption formation, expenditures, Distributiv e 10.30% 60.70% trade, 14.95%
Telecom & Ex ports- postal Gov ernment Other sectors, Im ports of services, consumption 9.92% goods and 1.83% ex penditures, Building & services, Finance & Solid Minerals, 5.93% construction, Manufacturing, 23.06% insurance, 0.28% 00.162 3.91% 3.90% Source: NBS So urce: IM F
Figure 34: Economic growth in Nigeria should accelerate this year Figure 35: …while non-oil real GDP has accelerated signficantly. Real GDP grow th (%) 14 Real GDP grow th Real non-oil GDP grow th % Nigeria Sub-Sahara Africa 12 12 10 10 8 8 6 6 4 4 2 2 0 E 0 E 10 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009 20 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Source: IM F So urce: IM F
Figure 36: Oil prices have skyrocketed since 2004. Figure 37: …leading to a rise in exports and imports of merchandise.
Bonny Light prices ($/bbl) Oil rev enue ($mn/day ) Ex ports of merchandise Imports of merchandise $bn 350 100 100
s 300 80 250 80 200 60 60 150 40 100 Bonny Light price 40 20 50 Oil revenue ($mn/bpd
20 0 0 2000 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2008E 2009E 2010E *March data
Source: OPEC Source: IM F
36 Renaissance Capital Nigeria 17 April 2008
Figure 38: The current account balance is positive. Figure 39: FDI have risen in the last three years of available data.
% Nigeria SSA Oil-importers 13.0 10.5 6 8.0 5
5.5 n 3.0 4 0.5 -2.0 3 -4.5 2 -7.0 Net inflow FDI, $b FDI, inflow Net -9.5 1 -12.0 -14.5 0 D 2000 2001 2002 2003 2004 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 *2008 2008Yt
Source: IM F Source: IM F, UNCTAD, NPIS
Figure 40: Nigeria is a debt-free country. Figure 41: Foreign reserves have reached $50 bn by end-2007.
40 Foreign reserv es, $bn R-ax is Import cov er of goods & serv ices (months) 35 120 25 30 100 20 25 80 20 15 60 15 10 40
External debt, $bn 10 20 5 5 0 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E
Source: IMF Source: IMF
Figure 42: Higher oil revenue implies a positive fiscal balance... Figure 43: …but the latter is driven by lower expenditures.
Overall fiscal balance (% GDP) Rev enue (% GDP) Ex penditures (% GDP) 10 45 40 8 35 6 30 4 25
2 % 20 0 15 -2 10 -4 5 -6 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009 E 2010 E
Source: IMF Source: IMF
37 17 April 2008 Nigeria Renaissance Capital
Figure 44: The naira has appreciated vs the $, not the euro. Figure 45: The REER has appreciated above the regional average.
Naira/$ Naira/Euro 200 200 180 Base: 2000 =100 160 180 140 160 120 140 100 80 120 60 100 40 Lcy / foreign currency 20 80 0 60 Kenya Ghana Angola Nigeria Malawi Zambia Uganda Namibia Mauritius Tanzania Botswana Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 South Africa Cote d'Ivoire Cote Mozambique
Source: Bloomberg Source: IMF
Figure 46: Inflation has declined sharply to single-digit levels… Figure 47: …a trend reinforced by falling food inflation. 20 45 Food inflation Headline inflation
18 40 Av erage inflation YoY (%) 16 35
14 Annual Av erage 30 12 inflation YoY (%) 25
% 10 20 8 15 6 10 4 5 2 0 0 -5 E -10 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009 2010 E Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: IMF Source: IMF, CBN
Figure 48: 12-month inflation in Nigeria is much lower than in SSA. Figure 49: Broad m oney growth has been contained in 2007. 50 14 45 Broad money grow th (%) 12 40 35 10 30 8
% 25 % 6 20 15 4 10 2 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008E Kenya Ghana Angola Nigeria Malawi Zambia Uganda Namibia Mauritius Tanzania Botswana South Africa Cote d'Ivoire Mozambique Source: IMF
Source: IMF, local sources
38 Renaissance Capital Nigeria 17 April 2008
Figure 50: Interest rates have declined. Figure 51: Deposit and lending rates have declined in previous years. 25 30 MPR and antecedents Deposite rate Lending rates 20 25
20
% 15 % 15 10 10 5 5 2000 2001 2002 2003 2004 2005 2006 2007 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Source: CBN Source: IMF
39 17 April 2008 Nigeria Renaissance Capital
Economic indicators
Figure 52: Nigeria economic indicators Country indicators 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E Output Nominal GDP, $bn 42.0 44.3 43.6 56.7 88.9 114.5 148.7 166.4 217.0 254.5 294.4 Nominal GDP(growth %) 5.4 5.3 -1.6 30.1 56.9 28.8 29.8 11.9 30.4 17.2 15.7 Nominal GDP market prices, NGNbn 4,676 5,339 5,632 7,533 11,674 14,735 18,710 20,845 25,141 28,150 31,200 Nominal GDP market prices (growth %) 35.9 14.2 5.5 33.7 55.0 26.2 27.0 11.4 20.6 12.0 10.8 Real GDP growth, % 5.4 3.1 1.5 10.7 6.0 7.2 5.6 6.3 9.1 8.3 7.0 Real oil-GDP growth, % 5.4 3.1 -11.5 26.5 3.3 0.5 -4.5 -5.6 9.0 7.5 2.5 Real non-oil GDP growth, % 3.7 4.3 8.0 4.4 13.2 8.6 9.4 9.6 9.1 8.5 8.1 Money and inflation Broad money (% GDP) 19.1 19.4 23.4 26.4 23.6 20.3 24.8 25.5 25.2 na na Broad money growth, % 48.1 27.0 21.6 24.1 14.0 16.0 39.9 10.7 14.5 na na Prime interest rate, MPR (end of period, %) 14.0 20.5 16.5 15.0 15.0 13.0 10.0 9.5 10.5 11 10 Inflation (average, %) 6.9 18.0 13.7 14.0 15.0 17.8 8.3 5.4 8.6 9.2 8.3 Inflation (end of period, %) 14.5 16.5 12.2 23.8 10.1 11.6 8.5 6.0 8.5 8.7 7.9 Fiscal performances Overall fiscal balance (% GDP) -2.8 -4.9 -4.2 1.3 6.3 8.10 7.7 0.9 6.2 4.8 4.6 Government revenue (% GDP) 19.8 26.3 22.9 21.0 35.4 38.1 34.1 28.2 31.1 30.7 30.9 Government expenditures (% GDP) 22.6 31.2 27.1 22.3 29.1 30.0 26.4 27.3 24.9 25.9 26.4 External position Exports of goods and services(% GDP) 43.0 43.3 40.8 49.7 54.4 55.9 55.6 52.4 50.4 n/a n/a Imports of goods and services (% GDP) 36.9 34.0 40.9 41.5 37.7 34.6 34.6 38.7 34.9 n/a n/a Current account balance, % 11.7 4.5 -11.0 -2.7 5.3 9.3 9.3 0.7 6.6 5.6 5.4 Current account balance, $bn 5.4 2.2 -5.4 -1.6 3.8 9.1 13.9 1.2 14.2 14.3 15.9 Exports of merchandise, $bn 19.1 18.0 15.6 24.0 34.8 48.1 56.6 58.6 75.5 76.8 80.5 Imports of merchandise, $bn 8.7 11.1 10.9 16.2 15.0 17.3 21.0 26.2 29.9 33.7 35.6 Terms of trade (index, 2000=100) 100 89.4 90.2 97.9 110.0 151.8 179.4 192.4 203.4 203.4 203.4 Capital flows Foreign direct investments, $bn 1.1 1.2 1.9 2.0 1.9 2.1 4.1 5.8 n/a n/a n/a Foreign Direct Investments (FDI%/GDP) 2.7 2.7 4.3 3.5 2.1 1.8 2.7 3.5 n/a n/a n/a External debt External debt, $bn 29.6 26.4 28.4 30.6 35.9 20.5 3.5 3.3 3.4 4.2 5.2 Exchange rates Nominal exchange rate (NGN/$), end of period 110.0 119.5 126.5 139.6 132.1 130.4 128.8 117.9 111.5 106.0 108.0 Nominal exchange rate (NGN/$), average period 111.2 120.6 129.2 132.9 131.3 128.7 125.8 125.3 115.5 109.3 105.7 Reel effective exchange rate (2000=100) 100 111.1 110.6 104.9 107.8 124.1 133.1 134.0 141.2 141.2 141.2 International position Foreign reserves, $bn 9.9 10.5 7.3 7.1 17.0 28.3 41.8 52.1 73.2 91.0 111.8 Import cover of goods and services (months) 6.7 7.8 5.8 3.6 5.8 8.3 10.1 11.2 14.1 16.6 19.2 Social indicators GDP per capita current, $ 328 337 322 408 623 783 992 1,083 1,378 1,580 1,784 GDP per capita growth, % 19 2.5 -4.2 26.6 52.7 25.7 26.7 9.2 27.2 14.7 12.9 Population 128 132 135 139 143 146 150 154 157 161 165 Population growth, % 2.7 2.7 2.7 2.7 2.7 2.5 2.5 2.5 2.5 2.2 2.5 Source: Renaissance Capital estimates, IMF, World Bank, Central Bank of Nigeria, National Bureau of Statistics, EIU
40 Renaissance Capital Nigeria 17 April 2008
Disclosures appendix
Analysts certification and disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about the issuer or issuers (collectively, the “Issuer”) and the securities and markets that are the subject matter of this report. Each research analyst hereby certifies that with respect to the Issuer and such securities and markets, all the views expressed in this document accurately reflect his or her personal views about the Issuer and any and all of such securities and markets. Each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or similar, for the purpose of gathering, synthesizing and interpreting market information. Any ratings, forecasts, estimates, opinions or views herein constitute a judgment as at the date of this report. If the date of this report is not current, the views and contents may not reflect the research analysts’ current thinking. This document has been produced independently of the Issuer. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, have verified the contents hereof unless disclosed otherwise below. Accordingly, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be relied upon by any of its recipients or any other person in making investment decisions with respect to the Issuer’s securities. This report does not constitute a valuation of the Issuer’s business, assets or securities for the purposes of the legislation on valuation activities for the Issuer’s country. Each research analyst also certifies that no part of his or her compensation was, or will be, directly or indirectly related to the specific ratings, forecasts, estimates, opinions or views in this research report. Research analysts’ compensation is determined based upon activities and services intended to benefit the investor clients of Renaissance Securities (Cyprus) Limited, RenCap Securities, Inc., Renaissance Capital Limited and any of their affiliates (the “Firm”). Like all of the Firm’s employees, research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm.
Important issuer disclosures Important issuer disclosures outline currently known conflicts of interest that may unknowingly bias or affect the objectivity of the analyst(s) with respect to an issuer that is the subject matter of this report. Disclosure(s) apply to Renaissance Securities (Cyprus) Limited or any of its direct or indirect subsidiaries or affiliates (which are individually or collectively referred to as “Renaissance Capital”) with respect to any issuer or the issuer’s securities.
Investment ratings Investment ratings are a function of Renaissance Capital’s expectation of total return on equity (forecast price appreciation and dividend yield within the next 12 months). The investment ratings are: Buy (expected total return of 15% or more); Hold (expected total return of 0-15%); and Sell (expected negative total return). Investment ratings are determined by the ranges described above at the time of the initiation of coverage of an issuer of equity securities, or a change in target price of any of the issuer’s equity securities. At other times, the expected total returns may fall outside of these ranges because of price movement and/or volatility. Such interim deviations from specified ranges will be permitted but will be subject to review by Research Management. It may be necessary to temporarily place the investment rating “Under Review” during which period the previously stated investment rating may no longer reflect the analysts’ current thinking. For issuers where Renaissance Capital has not expressed a commitment to provide continuous coverage, to keep you informed, analysts may prepare reports covering significant events or background information without an investment rating. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the security’s expected performance and risk.
41
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Automotive & Transport Oil & Gas Fixed Income Macro & Strategy + 7 (495) 258 7747 + 7 (495) 258 7904 + 7 (495) 258 7946 + 44 (207) 367 7781 Eduard Faritov Alexander Burgansky Alexei Moisseev Richard Segal [email protected] [email protected] [email protected] [email protected] Olga Agieieva + 44 (7880) 841 669 Nikolai Podguzov Samir Gadio Adam Landes Petr Grishin Viriya Tim Banking [email protected] Alexey Bulgakov + 7 (495) 258 7748 Elena Savchik Maxim Raskosnov Credit Analysis David Nangle Evgenia Dyshlyuk Andrey Markov +44 (207) 367 7931 [email protected] Roman Elagin Valentina Krylova John Bates Milena Ivanova Irina Elinevskaya Anastasiya Golovach (Ukraine) [email protected] Svetlana Kovalskaya Tatiana Sannikova Nargiz Sadykhova Kristina Lyadskaya Real Estate Olesya Cherdantseva + 7 (495) 258 7770 x4959 Maria Rakhmeeva Technology/ Media/ Telecoms Chemicals & Engineering Alexei Yazykov + 44 (207) 367 7734 +7 (495) 783 5653 [email protected] Economics & Politics Matthew Pearson Marina Alexeenkova Alexander Vengranovich + 7 (495) 258 7703 [email protected] [email protected] Katya Malofeeva Rinat Kirdan Telecoms, Media & Technology [email protected] Financials + 7 (495) 258 7902 Elena Sharipova + 234 1 271 9135 Consumer/Retail Alexander Kazbegi Igor Lebedinets Kato Mukuru + 7 (495) 258 7753 [email protected] Nina Dergunova [email protected] Natasha Zagvozdina Ivan Kim Sruti Patel [email protected] Tibor Bokor Ivan Nikolaev David Ferguson Metals & Mining Victor Dima + 44 (20) 7367 7777 Ulyana Tipsina Ukraine Equities/Strategy Mark Smith +38 (044) 492-7394 [email protected] Equity Strategy Wilfred Willwong + 7 (495) 258 7916 [email protected] East Africa Roland Nash Geoffrey Smith + 254 (203) 60 1822 [email protected] Vladimir Dinul Robert Bunyi Tom Mundy Svetlana Dryhush [email protected] Ovanes Oganisian Yulia Romanenko Mbithe Muema Vladislav Nosik Central Asia Equities/Strategy Serhiy Petrenko Southern Africa +7 (727) 244 1581 + 263 11 634 463 Gairat Salimov Utilities Dzika Danha [email protected] + 44 (20) 7367 7793 [email protected] Ekaterina Gazadze Derek Weaving [email protected] West Africa Metals & Mining Vadim Borokhov + 234 1271 91 33 + 7 (495) 258 7743 Vladimir Sklyar Adedapo Temitayo Orekoya Rob Edwards [email protected] [email protected] Esili Eigbe Yury Vlasov