In a four-day sweep through Nigeria early last year, Aberdeen Asset Management’s Kevin Daly detected trouble. Yes, the country was a rising African power and yes, it had become the world’s fastest-growing major economy, but things weren’t quite right. An Islamic insurgency was heating up in the north and there were early signs that a nasty presidential campaign was brewing.
Then financial disaster struck.
Oil, the lifeblood of the country, collapsed in a breath-taking free fall. Daly had seen enough. By November, he had sold all of his Nigerian government bonds.
Back in Lagos again last month for a fresh look, Daly found a country ravaged by crisis from all sides: the bloody clashes with Boko Haram insurgents had intensified; the violence had spurred authorities to postpone elections the president was in danger of losing; and the plunge in oil prices had depleted government coffers and triggered back-to-back currency devaluations. Nigeria’s benchmark equity gauge is the second-worst performer in the world this year — only war-torn Ukraine’s has fallen more — and the government’s local bonds have posted the biggest losses in emerging markets.
“Nigeria is very high risk right now,” Daly said after returning to London, where he oversees $13 billion of emerging-market bonds at Aberdeen, Europe’s largest publicly traded fund manager. His only investments left in the country are bank bonds.
That Daly, 54, has soured to such an extent on the West African nation is telling in of itself. He considers himself a long-term Nigeria bull, attracted by the economic growth potential, booming population and natural resources. (In addition to being rich in oil, the country’s savannas and mountains are fertile agricultural land and are lined with metals and precious stones.) Nigeria will become, he said, “the capital” of sub-Saharan Africa, if not all of Africa. “There’s significant upside if Nigeria can address a lot of its shortfalls.”
Right now, the shortfalls are all that most investors see.
The currency, the naira, has slumped almost 20 percent over the past six months, touching a record low of 206 per dollar in February. Even when compared with other oil-producing nations, the declines are stark: No other major exporter’s currency is down as much in 2015. Foreign investors in naira-denominated bonds have been saddled with losses of 9 percent this year once they convert their money back into dollars.
After burning through $5 billion of international reserves in the fourth quarter, policy makers tried a more heavy-handed tack to arrest the naira’s slide, imposing restrictions on Nigerians’ purchases of dollars. Those measures throttled trading in the currency market, with daily volumes shrinking to as little as $10 million a day. Before December, they regularly topped $300 million.
The economy is starting to sputter.
In January, the International Monetary Fund cut its 2015 forecast for Nigerian growth to 4.8 percent. That may not seem like much of a slowdown, but compare it to the country’s average annual expansion over the past 15 years: 9.9 percent. Nigeria has a predominantly poor, fast-growing population (the United Nations sees it climbing to the third-biggest in the world by 2050) that is consuming ever-greater quantities of food staples, clothing and whatever else can be found on store shelves. Those dynamics have fed the country’s spectacular growth rates — figures not even matched by China.
Nigeria’s gross domestic product swelled to over $520 billion, edging out South Africa for the top spot on the continent, after government statisticians overhauled the data last year to include more industries.
South African executives have started taking notice.
Miles Dally, chief executive officer of RCL Foods Ltd., said he’s looking for an opportunity to expand in Nigeria after bigger rival Tiger Brands Ltd. bought a flour mill company in 2012. Dally summed up his view of the country like this: “It’s a very challenging place to do business” but it’s also “the big prize” in Africa.
A key part of that challenge — perhaps bigger than dealing with constant power outages and rampant corruption — is doing business in Boko Haram-controlled areas. Tiger Brands has found that out, citing the violence as one of the reasons it’s struggled to turn a profit so far.
Aberdeen’s Daly also got a first-hand feel for the tension during his travels last year. As he arrived in the capital city of Abuja in central Nigeria, authorities were on high alert.
In a single day last year, Boko Haram, whose name roughly translates to western education is a sin, killed 75 people commuting into Abuja and abducted 276 school girls, most of whom are still missing. The group’s targeting of the capital is part of a broader ratcheting up of the insurgency that claimed at least 1,600 lives in January and more than 4,700 in 2014, twice the toll of 2013.
Earlier this year, in a market in Boko Haram’s stronghold of northeastern Nigeria, a girl who onlookers described as about 10 years old detonated explosives hidden under her veil, killing herself and some 20 other people. Days earlier, in a succession of attacks on towns in the north, Boko Haram militants killed hundreds of residents. Troops from Chad, Cameroon and Niger, as well as Nigeria, are fighting the rebels.
To understand Boko Haram’s growth, just take a good look at how impoverished many parts of the country are.
“When you have a system in which 90 percent lives in poverty, 70 percent in absolute poverty, you’re likely to have one problem or another,” Sanusi Lamido Sanusi, the central bank governor, said during a meeting in Abuja with Daly weeks before he was driven out of his post.
Now the emir of Kano, the main city in northern Nigeria, Sanusi has been focused on initiatives to alleviate poverty.
One of those involves tomatoes.
Sanusi found they were mostly being left to rot in the fields, while imports of tomato paste — a staple ingredient for suya meat sticks flavored with hot chili and ground peanuts and sold on every main street — cost $360 million a year. A lack of storage facilities or food processors meant that tomato farmers would take whatever price they could get — or leave the fruit to decay.
Sanusi teamed up with industrialist Aliko Dangote, Africa’s richest man and a fellow Kano native, to build a $25 million tomato paste factory that bought tomatoes at a fixed price from 8,000 farmers. With a contracted income, farmers were able to borrow to buy their seeds.
The factory’s output enables Nigeria to cut tomato paste imports by a third, Sanusi says, and ease the deprivation that has made the north fertile ground for Boko Haram recruiters.
Nigerian President Goodluck Jonathan ousted Sanusi from the governor’s job after the central bank urged the president’s office to investigate the disappearance of tens of billions of dollars in oil revenue. Sanusi was never charged with any wrongdoing.
“The episode should remind investors that Nigeria’s country risk is high,” Daly says.
Jonathan is now scrambling to keep his own job.
Polls show the vote pitting him against former military leader Muhammadu Buhari will be the tightest since the end of army rule in Nigeria 16 years ago. Electoral officials pushed back the vote to March 28 from its originally scheduled date of Feb. 14 after Jonathan’s security adviser told them the military needed more time to quell the insurgency and guarantee people’s safety as they vote.
Jonathan’s finance minister, Ngozi Okonjo-Iweala, shares Sanusi’s obsession with fighting poverty. For her, credit — or the lack thereof in Nigeria — is key.
In a sitdown last year in Lagos, Africa’s biggest city, Okonjo-Iweala said she had been studying the finances of a couple, Alhaji Kamoru Yusuf and his wife, Bolanle, to try to understand what’s right and wrong with the economy. The two had taken out short-term loans to progress from a roof-nail business to building Nigeria’s first cold-roll steel mill in an effort to compete with Chinese exporters.
Like tomato paste and fuel, steel is a natural for Nigeria, where the government says more than 3 billion metric tons of iron ore lie untapped. Alhaji and Bolanle succeeded, Okonjo-Iweala says, but she wants to make it easier for others to follow suit.
What’s missing in Nigeria, she says, is a state-backed development bank along the lines of Germany’s KfW or Brazil’s BNDES. “You can’t expect people to borrow short term — for three years — to invest in a 15-year endeavor,” she says.
In December, she took her biggest step yet to addressing that need, securing a $500 million financial package from the African Development Bank to support the establishment of a similar institution. The lender, to be called the Development Bank of Nigeria, will also seek funding from international investors looking to make a positive “social impact.” Being accountable to these backers will help to prevent the bank from becoming another corruptible institution in a country ranked among the world’s 36 worst for graft by Transparency International, according to Okonjo-Iweala.
Peering into the future — beyond telecommunications, manufacturing and construction — Okonjo-Iweala sees growth coming from non-oil minerals yet to be exploited, everything from copper to tantalite.
Then there’s Nigeria’s best-loved industry: Nollywood.
Measured by the number of movies made per year (not box office earnings), Nigeria’s film industry ranks second only to India’s Bollywood, with Hollywood trailing a distant third.
“It’s amazing to me,” Okonjo-Iweala says. "When I’m in the Caribbean, people say: 'Are you Nigerian? We’ve been watching your movies.' The potential to service the black diaspora and beyond is amazing; we’ve only just begun to plumb that. Nigeria has the potential to be another California."
If one man is the face of Nigerian business, it’s Dangote.
From his headquarters on Lagos Island, he presides over a vast enterprise stretching from cement to telecommunications. Even after the fallout from sinking oil prices cut his personal fortune almost in half, he still has a net worth of $13 billion.
His next venture: Oil refining. Unfazed by the 47 percent selloff in crude, Dangote is betting on Nigeria’s future energy needs by investing $9 billion in a refinery and petrochemical plant in the Lagos area.
The business opportunity is created by Nigerian neglect. Most of the crude destined for the local market today takes a circuitous route to get there. Pumped in the Niger River delta in the south and offshore in the Gulf of Guinea, it is then shipped abroad to be refined before returning to Nigeria as fuel. The country has four refineries, but pipeline theft, fires and neglect have reduced their output to a fifth of capacity.
Devakumar Edwin, an executive director at Dangote, said the refinery will produce 400,000 barrels a day initially and eventually reach a million barrels, which would make it the second-biggest refinery in the world.
With daily production of about 2 million barrels a day, oil generates 90 percent of Nigeria’s hard-currency earnings. About 20 percent of that output comes from smaller drillers — those pumping up to 100,000 barrels.
Guys like Kola Karim.
He says that his company, Shoreline Natural Resources Ltd., is getting squeezed hard by the combination of plunging prices and a pickup in oil theft along the delta.
Many smaller drillers obtained financing based on a price of $70 a barrel, leaving them “under water” at current prices of about $60, according to Karim, the chief executive officer at Shoreline.
He expects some will merge in a bid to cut costs and stay in business. “It’s difficult in a down market when you’re a small producer trying to weather the storm alone,” Karim said.
And then he captured the mood of an entire nation when summing up his company’s struggles.
“You face the devil on all sides.”
(Parts of this article were adapted from Frontier: Exploring the Top Ten Emerging Markets of Tomorrow (Wiley/Bloomberg Press, February 2015)).
—With assistance by Elisha Bala-Gbogbo in Abuja, Paul Wallace in Lagos and Ye Xie in New York.
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