…Africa’s second largest economy and a potential rising regional power.
Nigeria, with about $215 billion in GDP last year, follows South Africa and leads Egypt in Africa in terms of the size of its economy, but lags both countries in wealth per head, with roughly $1350 of GDP per capita. Nigeria relies very heavily on oil exports to fuel its economy. Recent high oil prices have provided this classic developing country — with its poverty, mineral wealth, political instability and corruption, as well as reforms and emerging institutions — with strong GDP growth and a strong external balance sheet (foreign exchange reserves in excess of government liabilities to foreigners). With 155 million people, 250 ethnic groups, many languages, and a 50%-40% Muslim-Christian divide (view map below), this simmering rising power in West Africa is one to watch, if not next year, then some time this century. Check out the CIA Factbook on Nigeria.
Of note is the ongoing conflict between the government and Islamic militants, putting Nigeria right smack on one of Huntington’s fault lines between civilizations. See this article on recent unrest.
Nigeria: At the Faultline Between Islam and Christianity Source: http://www.getreligion.org/wp-content/photos/NigeriaStatesMap.gif
Of interest as well is Fitch’s report on Nigeria, published last month, when the agency affirmed the country’s sovereign ratings. See below.
“Fitch Affirms Nigeria at ‘BB-‘/’BB’: Outlook Stable
03 Jul 2009 6:30 AM (EDT)
“Nigeria’s strong sovereign balance sheet is the main support to its ratings. Although weakened by a major reserve loss since September 2008, its balance sheet still stands out amongst its rating peers,” says Veronica Kalema, a Director in Fitch’s Sovereign Department.
“Earlier banking sector consolidation also resulted in a well-capitalised banking system, which together with Nigeria’s strong overall and public net external creditor position and low government debt, have helped cushion the economy against the collapse in oil prices, the global recession, a reversal of capital flows and the banking sector’s exposure to a sharp fall in equity prices. With some signs of global stabilisation now apparent and a recovery in oil prices, Nigeria looks likely to weather the shocks,” adds Kalema.
The government moved swiftly to base the 2009 budget on a lower benchmark oil price of USD45/barrel (Fitch has a forecast of USD55/barrel for 2009 and the oil price is currently around USD70/barrel). Nevertheless, oil production shortfalls below the budgeted 2.3 million b/d continue to present a serious revenue challenge. However, this will be offset by the higher- than- budgeted oil price, reduced disbursements from the Excess Crude Account (ECA) and likely under-execution of the Federal Government (FG) budget. The domestic debt market provides financing flexibility for the FG and a few sub-nationals that have started to tap it to fund development spending. Nevertheless, sub-nationals face a serious revenue squeeze, and there is a risk that this will result in further disbursements from the ECA. Fitch forecasts small budget deficits at the FG and consolidated government levels and continuing low public debt of 12% of GDP in 2009, well below the ‘BB’ median.
The Central Bank of Nigeria (CBN) at first used reserves to support the naira in the face of lower oil revenues and capital outflows in the second half of 2008. Amid some confusion as to its policy goals, which heightened speculative pressure, CBN starting in late November eventually engineered a roughly 20% depreciation and stabilised the market, albeit by resorting to a temporary reversal of foreign exchange liberalisation. The naira is now at a more realistic rate consistent with lower oil prices and restrictions have begun to be eased. Despite a significant depletion of reserves by 28% to USD44.8bn in May 2009 since the peak of USD62.1bn in September 2008, low foreign liabilities of both the public and private sectors mean that Nigeria’s external balance sheet remains robust and is still one of the strongest in the ‘BB’ category. The recent increase in oil prices, if sustained, should slow the pace of reserves depletion. However, the reserves cushion has been eroded and any renewed bout of lower oil prices would likely trigger further downward pressure on the exchange rate, accelerate reserves depletion and is likely to bring negative rating action.
Unlike other countries in the region, Nigeria’s banking system has been under strain due to margin loan exposures to the sharp fall in equity prices. The loss of confidence together with lower oil revenues has also resulted in a liquidity squeeze on the money markets which, despite measures to inject liquidity, is still not fully alleviated. Although the system’s high capitalisation means that it can absorb the bulk of the losses without any support from the sovereign, the problems have exposed severe weaknesses in banking regulation and risk management. These will be the key focus of the new central bank governor, Lamido Sanusi, who as a former banker is well-qualified to address them so as to restore confidence in the financial system so that it can better support real sector development.
Nigeria’s ratings are hampered by data weaknesses and lack of transparency in several key areas including public finances, the balance of payments, international reserves and the banking system. Improvements are essential to enhancing creditworthiness.
Following an average of 6%+ growth in 2004-2008, in 2009 growth will slow to around 3%, reflecting much lower fiscal spending, private credit growth, remittances and oil prices/production. However, this will be in line with regional growth and much higher than the ‘BB’ median. Reforms and investment in infrastructure have slowed under the current administration, although there are now signs of revival. Niger Delta (ND) insecurity has further reduced oil production this year and is an ongoing rating constraint. More broadly, it has adverse implications for the government’s power and gas sector strategies necessary for further diversification and raising Nigeria’s growth potential. Improvements in the ratings will also depend on sustaining non-oil growth and raising per-capita income by addressing infrastructure through investment and reforms.
A copy of the sovereign report on Nigeria will be available shortly on Fitch’s website www.fitchratings.com.
Contact: Veronica Kalema, London, Tel:+44 (0) 20 7417 6336; Richard Fox, +44 (0) 20 7417 4357
