Why Nigeria Could Soon Become The Biggest Economy In Africa
Many people only know about Nigeria from the so called "nigerian scams"and would
be surprised to learn that Nigeria could soon become the biggest economy in Africa.
Why does Nigeria have such tremendous potential?
The reasons for the current interest in Nigeria are:
* Nigeria its getting better from a low base because of reform. The long-term potential is huge.
* Nigeria is resource rich; they are already producing 2mbpd of light crude + top 10 gas producer (mostly flared)
* Population of 120m permits economies of scale
* Economy- De-industrialised under military rule; improving slowly
* Agriculture totally neglected; improving
* Bank intermediation; just starting
* Entrepreneurs appearing; diasporareturning (slowly)
* Cellular telecoms; a dramatic impact
* Management of state pension funds privatised
* Vibrant stock market
What is holding Nigeria back currently?
* Reform of the oil companies is essential
* Poor infrastructure; recognised as key constraint
* Politics
* First civilian-civilian transfer of power has occurred
* Electoral reform still needed
* Companies- Non-oil, non-bank growth funded from free cash flow Oligopolies and duopolies abound; very high ROE's
* Main problem area: a banking crisis in Nigeria
* Overall, there is little lending in Africa due to poor legal infrastructure
* Response to reduced inflows (remittances + trade finance + FDI) was devaluationa)
* Devaluation is not possible with large foreign denominated debt 'Africa is largely debt freeb)
* In a credit crunch Devaluation is only transmission mechanism of monetary policyc)
* It is the quickest policy option to discount a changing outlook
How did Nigeria solve their banking crisis?
Nigerian Implemented 25 Changes were implemented:
*Devaluation, new CBN Governor
* 8 banks rescued; CEO's replaced
* All bad and even suspect loans written off in 2009
* Asset management company being set up.
* CBN guaranteeing all interbank loans to end 2010
What is the current situation in Nigeria?
* Nigerian banks owned 17.3% of equity market (market capitalisation of NSE is only 21% of GDP)
* Locals in shell-shock; always best to buy a bank out of administration
* Tax on interest on Corporate bonds abolished to encourage bond market
* "normal" recovery process in a bank crisis: a)(forced) devaluation b)recapitalise banks c)correct valuation of bank assets d)removal of failed bank executives e)maintain a steep yield curve f)transfer of assets to strong owners.
These are some of the many reasons to keep your eye on the Nigerian market. What is needed is for investors to coordinate and work with local advisors who have the experience and knowledge they can rely on.
Remember also that with the potential upside potential also come the same level of risk. Therefore investing into Nigeria whilst potentially profitable is not for the fenit of heart.
by: Alvin Donovan
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