The Nigerian investment climate: Opportunities amid headwinds
After nearly four years in office, the government of President Muhammudu Buhari has disappointed an electorate who were promised better security and a stronger and more diverse economy. A prolonged recession is over but economic recovery has been weak despite high oil prices; insecurity and sectarian violence have spread further across the country, and high inflation eats into living standards. This government’s stated priority has been to support domestic and international investment in the non-oil sectors where the scope for growth and job-creation is greatest and to reduce Nigeria’s dependence on the oil and gas industry which provides nearly all its exports and government revenue. The results are so far limited and restructuring the economy in this way will take years, but the government’s recent punitive action against the telecommunications market leader, South Africa’s MTN, has had a chilling effect on investor sentiment. From now until February 2019 the focus for the governing All Progressives’ Congress will be on raising funds and winning close-fought elections as defections and internal splits threaten to derail its campaign.
The recovery in the oil market last year has stabilised the economy. The oil price recently hit a four and a half year high of $85 a barrel. Output is still below capacity as a result of disruption by restive communities in the Niger delta, but has risen above 1.7 million barrels of oil a day. This has replenished foreign currency reserves, allowing the Central Bank of Nigeria to sell dollars to prop up the value of the naira, which President Buhari sees as a priority. The main constraints to doing business in Nigeria remain its harmful regulation, poor infrastructure and high levels of corruption and insecurity. The current government’s over-regulated foreign exchange system has added to these difficulties. Economic recovery has also been slowed by the government’s tight monetary policy with high interest rates and low availability of credit depriving all but the biggest local companies of the capital they need. Some investors are holding back capital because pressure on the naira exchange rate makes another devaluation likely, even if this is delayed until after the elections. Devaluation is likely to spur on inflation, which peaked at nearly 20% last year and remains in double figures, squeezing margins and weakening consumer demand.
Technology deals and regulatory aggression
Nigeria is Africa’s largest economy and investment prospects in Nigeria’s technology-driven financial services and telecommunications sectors are good. This is reflected in recent deals completed in the country: according to the Emerging Markets Private Equity Association, financial and technology sector deals have accounted for 39% of all private equity investments in Nigeria from 2017 to H1 2018. The country’s IT and technology sector has had a recent boost from a modest but high-profile investment into the pan-African coding school Andela, which is backed by Facebook co-founder Mark Zuckerberg, among others. Teleology Holdings Limited, a Nigerian investment firm, is completing a $450 million takeover of 9mobile, a large Nigerian mobile network operator, and Nigerian e-commerce company Konga has revealed its plans to invest N2.9bn (USD 8 million) in its logistics division K-Xpress. The company says it will develop software aimed at solving logistics problems that are crippling e-commerce in Nigeria.
However, sustainable growth depends on political and macroeconomic stability and a curb on the arbitrary government intervention that has marked its recent dealings with South Africa’s MTN. The demand on 28th August that mobile phone market leader MTN repay $8 billion in remittances to its South African parent deemed illegal by the central bank has shaken investor confidence. The local subsidiaries of Citibank, Standard Chartered and Standard Bank of South Africa are being heavily fined for their role in the transactions. The MTN issue has been a big setback for those seeking to raise capital in the technology sector. MTN’s proposed listing on the Nigerian Stock Exchange, making it the largest stock, promised to be a turning point, but is now in doubt according to the company.