The investment environment in Nigeria after Covid-19
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Tola Oshobi
Babalakin & Co, Lagos
toshobi@babalakinandco.com
Abass Yusuf
Babalakin & Co, Lagos
ayusuf@babalakinandco.com
Economists expect the global economy to experience a deep recession this year, due to the Covid-19 pandemic and the lockdown imposed in many countries to contain it. It is also predicted that this will lead to the collapse of stock markets and a diminished value of listed and private companies across the world.[1] There is a lot of fear mongering that companies and countries with large cash reserves, such as China, will take advantage of this situation to amass assets across the globe at a fraction of their real value.[2] There is panic in many countries at this prospect and a lot of rhetoric about introducing legal and regulatory measures to prevent or mitigate this eventuality.
Experts suggest that Nigeria, Africa’s largest economy and market with a population of 200 million people, faces tough economic times in the near future, due to its own peculiar circumstances. The situation is compounded by the economic impact of the pandemic and the consequential partial or wholesale shutdown of several of its cities and states.
The perennial affliction of the Nigerian economy is its overdependence on a single commodity, petroleum, as a source of foreign exchange earnings and government revenue. This is a malady that Nigerian economic planners have been unable to wean the country from. The state depends on petroleum for 90 per cent of its export earnings and for between 60 per cent and 80 per cent (depending on the performance of the oil market within any given year) of its revenues.[3] The national economy’s dependence on oil as a source of foreign exchange has been diluted in recent years by rising foreign direct and portfolio investments but especially due to record remittances by Nigerians living in the diaspora.[4]
The recent price war between Russia and Saudi Arabia (the two biggest exporters of crude oil) led to a crash in oil prices, which had not been performing very well to begin with. This was compounded by the unprecedented decline in demand arising from the global shutdowns due to the pandemic. For the first time in decades, crude oil was trading below $20, and it was reported that forward contracts for the benchmark US Western Texas Intermediate (WTI) grade were trading in the negatives.[5] At the same time, it was reported that Nigeria had several crude oil cargoes on the high seas with no buyers.[6]
The crisis in the global petroleum industry affected all producers but probably Nigeria more than most. It is said that Nigeria has one of the highest costs of production of crude oil in the world, hovering between $16 and $22 depending on the specific oilfield.[7] This means that at a point Nigeria was producing oil at a loss. The national budget of Nigeria, against sound advice, is predicated on a minimum oil price of $50 a barrel.[8] Bureaucrats are now scrambling to revise the budget and base it on an estimate of $20 a barrel.[9]
Nigerian foreign reserves have also been depleted from an all-time high of approximately $68 billion between 2007 and 2009 to about $35 billion today,[10] an indication of the extent of Nigeria’s capacity to meet its international trade obligations. Add the recent sharp decline of the interest rate on Nigerian government securities from the usual double-digit rates to single-digit rates,[11] and Nigeria would seem not to be a preferred destination for foreign portfolio investments.
During the lockdown, which spanned the whole of April this year, the Nigerian naira lost about 30 per cent of its value against the dollar in the spot market.[12] The Nigeria Stock Exchange also recorded a significant drop in the value of its all share index and many listed companies reported poor first-quarter results -- although a few, especially the banks -- declared strong results.[13] It has been suggested that the performance of the banks is mainly due to a revaluation of their holdings in dollars and other major currencies in Nigerian naira terms to adjust for the naira’s loss of value.[14]
The government announced it would ease the lockdown from 4 May 2020 in Lagos (the economic capital), Abuja (the political capital) and Ogun (an important industrial state neighbouring Lagos). This coincided with a slight recovery in crude oil prices with both the Nigerian grades of Brent crude breaking the $30 barrier when the markets closed on 19 May 2020.[15] Similarly, the naira witnessed an appreciable but temporary recovery of value in the spot market, though it has since lost its gains. Also, its value in the forward market is still about 25 per cent lower than the spot value.[16] The Nigerian Stock Exchange was also bullish in the first week after the lockdown and has regained at lot of its lost value.[17] It remains to be seen whether this trend is merely tentative or will be sustained in the short to medium term.
The lockdown has placed a heavy strain on Nigerian businesses and their capacity to meet their debt service obligations to creditors. The Central Bank of Nigeria has announced some palliative measures[18] but it is feared that, with the best of efforts, several companies will become insolvent and would have to contend with liquidation, receivership and other debt recovery measures from creditors. This also means an increase in the burden of bad and doubtful debts on Nigerian banks, which may affect some banks' solvency of some of them and make them vulnerable to takeover bids or mergers.
The situation of indigenous independent petroleum production companies is particularly interesting. According to a recent report, 90 per cent of the portfolio of bad and doubtful debt of Nigerian banks (estimated as equivalent to US$8 billion) is owed by these companies.[19] Most of these facilities are said to have been predicated on crude oil prices in excess of $50 a barrel. Needless to say, these facilities are in a precarious situation given the weak oil prices.
It is not all doom and gloom, though. Nigeria still has good fundamentals – the relative size of its economy, its large population (mostly young and tech savvy) and especially its strategic location, which makes it a good staging post to reach the wider West and Central African markets. The pandemic will not last forever, oil prices will certainly recover, Nigeria is rich in natural resources and virtually its entire land mass is excellent for agriculture. Paradoxically, therefore, this may be the best time to take a position in the Nigerian economy.
The combined effects of the devaluation of the naira, pervasive corporate insolvency and falling value of share prices (all likely to be temporary) mean that many Nigerian companies and assets are ripe for acquisition at a fraction of their erstwhile values. A relatable example is Aliko Dangote, the richest man in Africa, according to Forbes magazine. In its latest ranking, although he retains his title, his net worth has taken a big hit due to the decreased value of his shares and the devaluation of the Nigerian naira in which they are quoted.[20]
A lot of companies will be looking to recapitalise and the banks will seek to sell or liquidate some to recover loans extended to them. To hedge against exchange rate risk, investors could target export-orientated companies or companies that derive their revenues in dollars or other exchangeable currencies. This is a good time to invest in export trade finance and the Nigerian mining industry. Due to the depressed naira, investors may make windfall profits. This may also be a very good time to invest in the Nigerian petroleum industry or take a position in one of the independent producers (struggling to manage their debt burdens) in anticipation of a rebound in crude oil prices.
An exciting new mining project in Nigeria is the Segilola gold project. The project is owned by Thor Explorations Limited, a Canadian company listed on the Toronto Stock Exchange, through its wholly owned Nigerian subsidiary. Having established gold reserves in commercial quantities the company went to the market to raise US$98m to take the project to production but has to date raised in excess of US$104m. They have also signed a lump sum fixed-price contract with Norinco, an engineering, procurement and construction contractor, and the project is on schedule to come on stream at the beginning of the second quarter of 2021.[21]It is remarkable that while crude oil prices (the mainstay of Nigeria’s economy) fell into negative territory during the pandemic, there was a sharp inverse rise in gold prices, which now trades above $1,700 an ounce.
There are little or no barriers to investing in most sectors of the Nigerian economy. Unlike some countries, the chance that the government will introduce any new legal or regulatory impediments is next to nil. This is because Nigeria will need all the investments it can attract at this time and cannot afford to be discriminatory. Naturally, would-be investors will have to navigate through some general and sector specific laws and regulations but nothing onerous.
On balance, it appears that Nigeria will be a viable investment destination after Covid-19 and the time to act is now.
[21] We were privileged to advise the original owners of this project who remain significant minority stakeholders in Thor Explorations Limited.
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