Welcome to our weekly insight on the Nigerian economy! Take a moment to subscribe if this email was forwarded to you.
|
|
|
Why Nigeria is losing its investment appeal
|
|
|
|
The 1st of February was a bad day to be Nigerian. The Lagos Okada ban was implemented, President Trump announced visa restrictions for Nigerians, the end-of-January border reopening target was missed, and there were false rumours of coronavirus in Lagos.
That same day, another story broke that summed up the situation: the World Bank removed Nigeria from its ranking of the top 5 emerging markets to attract private investment.
It might be Valentine’s Day today, but there is no love for Nigeria’s economy. This sequence of negative events has made investors nervous about investing in the country. So today, we help you think through how this affects the economy around you.
|
|
WHY DOES INVESTMENT MATTER TO NIGERIANS?
Well, did you know that you could summarise an economy in just one equation? Now that you are a Stears Business reader, if you ever want to show off your economic prowess, casually drop the equation that shows the components of an economy:
GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports - Imports)
For the Nigerian and most other economies, consumption accounts for 70-80% of GDP, followed by investment which is responsible for over 20% of the economy.
Put simply, a fifth of the Nigerian economy is driven by investment.
Still, this undersells how important investment can be. Compare the decision to spend ₦1 million on a club night out with using ₦1 million to invest in training a software developer.
The clubgoer might enjoy a night to remember, but that ₦1 million goes back into the economy and life moves on.
The developer training programme, however, has not only made the economy ₦1 million richer but also invested in skills which can earn the student a job as a software engineer. Employers will absorb a new global skill that can produce high output and revenue, and the developer can earn a salary that allows her to recoup the ₦1 million and even enjoy many nights at the club (or head off to Canada).
As you can see, the ₦1 million investment goes much further.
A similar situation occurs when investors (or the government) invest money in building infrastructure. Every ₦1 paid to a construction worker to build an airport is an extra ₦1 earned by that worker. But once the airport is up and running, many other people (travellers and traders alike) would be able to make money from the structure’s existence. That ₦1 generated more than ₦1 worth of benefits for the economy.
Economists call this the multiplier effect.
|
|
DOES THE CORONAVIRUS MATTER TO THE NIGERIAN ECONOMY?
Now that we understand the role of investment, we can go on to focus on internal and external events that are making investments in Nigeria a little bit more difficult.
So far, the coronavirus has disrupted economic activity in China as people have been encouraged to stay indoors. Trading has slowed, shops have closed, and many large bus and train terminals are also shut.
While there are no confirmed cases in Nigeria, China’s significance to the global economy—and Nigeria, in particular, creates cause for concern.
Nigeria’s relationship with the Asian superpower runs deep; China is our largest trading partner, accounting for 30% of trade, mostly imports of machinery.
China is also Nigeria’s main project financier and has funded a number of key projects in sectors ranging from transportation to agriculture. Between 2000 and 2016, Chinese companies earned over $34 billion implementing projects in Nigeria.
The relationship is so close that many have accused China of adopting a form of economic colonialism.
|
|
Even the ever-present Central Bank of Nigeria (CBN) has buddied up China. As part of a 2018 currency swap deal, the CBN keeps the Chinese Yuan as part of its international reserves and regularly sells the currency to Nigerian importers of Chinese goods, a treatment hitherto reserved for the American dollar.
All of this means that as the Chinese economy slows down, Nigeria’s will follow.
For example, last week, Chinese copper traders asked miners from Chile and Nigeria to cancel or delay shipments. This is bound to have a sizable impact on metal producers as they lose business from their largest customer.
Nigerian importers are already feeling the impact as their Chinese counterparts have closed up shop. Some importers have even complained that their logistics and shipment suppliers for Chinese goods had shut down as a result of the virus.
|
|
YOU CANNOT TAKE THE OIL OUT OF THE NIGERIAN ECONOMY.
While investors will be wary about a slowdown in China-Nigeria activity, they are keeping an even more watchful eye on oil prices, the lifeblood of Nigeria’s economy.
China is the world’s largest crude oil importer and they just reduced their demand by 20%—a quantity equivalent to how much oil is consumed in the United Kingdom and Italy combined.
No surprise then that oil prices have tanked by 20% from the start of the year. Brent crude, the most popular global oil benchmark, now hovers at $55 per barrel and oil analysts expect it to remain in the 50s till late in the year.
To see why that’s particularly bad news for Nigeria, consider that the Federal Government 2020 Budget assumes an average crude oil price of $57 per barrel. Lower oil prices will hamper the government’s ability to execute the first on-time budget in a decade.
We will either need to borrow or wait for another Abacha care package from Switzerland.
But truth be told, it’s still too early to tell the extent of the coronavirus issue on Nigeria's trade activity or oil prices. As one economist put it, "If the epidemiologists are unsure how events will play out, then you should be sceptical of any economist that claims to know better.”
One thing is sure though: investors hate uncertainty and that is enough to convince them to exit stage left.
So the real question is not whether the coronavirus will dampen Nigeria’s investor appeal, but by how much.
|
|
NAIRA IS SWEET, BUT THE $$$ IS SWEETER.
There’s another important way investment is useful, albeit foreign investment in particular.
Remember that we need forex to pay for our foreign toothpicks and rice imports. If dollars are scarce in the economy, the CBN will start banning us from getting those items abroad.
So if wary investors stop bringing their dollars, prepare to make do with the local substitute to your favourite imported item.
Generally, foreign money—specifically foreign direct investment, which is long term money—is instrumental for economic growth.
Research by Harvard University showed that when foreign investment triples, economic growth can increase by up to 1.25 percentage points. So, Nigeria’s paltry growth could go from 2.2% to 3.5%.
A tripling of foreign investment isn't far fetched either; Nigeria’s foreign direct investment rose from $1bn in 2010 to over $3bn in 2013. Today we’re back at the $1bn mark.
Nigeria has many case studies on the impact of foriegn direct investment. From the impact of multinationals like Indomie or Unilever that brought new goods into our market and spurred local copycats, to Nigeria’s reliance on international oil companies to help us dig up our precious crude oil.
As with the oil exploration example, global technology is more than a nice-to-have; at times, it can make or break an industry.
|
|
REGULATE THE INVESTORS OUT OF THE COUNTRY.
We’ve looked at the impact of the coronavirus and why investment in Nigeria is at risk. But remember, there were other big news stories on the 1st of February. How would those ones affect investment?
The big problem is uncertainty. If you consider a company or an investor with millions of dollars looking to invest in Nigeria over a long period, certainty is super important.
The Okada ban and border closure are relevant stories to explain. In both instances, businesses have lost money due to unpredictable government regulation or policy. Millions of dollars have been pumped into the bike hailing space. Max.ng and Gokada alone had raised over $12 million before the ban came into place. Moreover, Nigeria imported ₦60 billion worth of motorcycles from China in 2018.
There are many pros and cons of the ban but one conclusion is clear: drastic government action can upend your business in a single day.
So much for ease of doing business.
PwC measured the correlation between foreign direct investment and 19 potential factors. The results showed that the burden of government regulation was the second-highest determinant of foreign investment, after trade openness (hello, border closure).
|
|
Closer to home, the National Bureau of Statistics conducted a survey of small and medium businesses in Nigeria. Some key challenges were highlighted; one was an unstable policy environment and the other was excessive regulation.
You see, sometimes it is less about whether the policy action was the right call, and more about i) the unpredictability of government actions ii) the way they communicate (or don’t) and iii) the perception this creates. The more erratic and impulsive policy-makers seem, the fewer investors are attracted to a market.
That being said, it's not all doom and gloom for the Nigerian economy.
We went up 15 places in the World Bank ease of doing business rankings (if you believe them) and legislative activity like the passing of the Finance BIll and discussions around the Petroleum Industry Bill bode well for clarity. Most promisingly, Nigeria’s technology scene remains attractive, raising a record $660 million last year, the highest in Africa.
There are a few things about Nigeria that make it hard for investors to ignore; our people and our oil. For everything else, they will look elsewhere.
And eventually, so will Nigerian investors. How else would you explain the Nigerian businessmen valiantly trying to get travel visas to China despite the Coronavirus? Perhaps even the centre of an epidemic is a more appealing investment destination.
All in all, Nigeria needs to do far more work to make itself attractive to investors, and for those of you still interested in Nigeria and the Nigerian economy, see you next week!
JOB: Stears is hiring an Economist to join our data team. Apply here.
|
|
Thank you for reading our weekly insight! You can subscribe if this email was forwarded to you.
|
|
|
|
|
|
