Nigeria, the Troubled Economic Giant

The Modern Portfolio Theory in the early 1970s argued that investors should invest in Asian and Latin American stock markets that are less intertwined with the European and American stock markets. Today, investors are now increasingly looking for new, potentially booming investment opportunities in Africa. The new investment opportunities would require characteristics similar to the Chinese market in the 1970s, namely a sufficiently large economic market with profit and growing perspectives, natural and human resources, and little or no connection with any other markets.

The economic market that fits the criteria best would be Nigeria. In 2014, Nigeria overtook South Africa as the largest economic market in Africa. Besides being the 20th largest economy in the world with a GDP of US$500 billion, it is the most populous country in Africa at 174 million, also making it the seventh most populous country in the world. With these statistics, Nigeria offers itself as an interesting investment opportunity with plenty of growth possibilities. Even though there is still a strong bias towards the oil industry, the market is diversifying as telecommunications, consumer products and the automotive industry become increasingly more important. Other factors that would make an investment worthwhile include the little amount of government debt, abundant natural resources, a big working population, as well as the absence of big currency fluctuations.

Following this logic, many companies and private investors have decided to invest in Nigeria to diversify and profit from the potential economic growth of Nigeria and Africa as a whole. However, while investing in general is not without risk, investing in Nigeria appears to be riskier than usual. While it is one of the more developed countries in Africa, it still has its issues. Nigeria ranks 136 out of 173 on Amnesty International’s Corruption Perceptions Index, making it one of the more corrupt countries in the world. Moreover there are about three to five million Nigerians living with HIV/AIDS, and ethnic and religious conflicts between Muslims and Christians are commonplace. This has manifested itself in the formation of radical religious groups such as the Islamic group Boko Haram, which from its founding in 2002 has been trying to enforce Sharia law and make Nigeria an Islamic country.

Graph 1: FDI Nigeria (World Bank)

One recent example of instability in Nigeria is the abduction of 276 schoolgirls by the group in April 2014. These events tend to scare investors away, as seen in Graph 1, the Foreign Direct Investment (FDI) graph of Nigeria. Graph 1 shows greater volatility than Graph 2, which displays the FDI in China and has been somewhat steadily increasing over time. One of the reasons FDI dipped from 2009 to 2010 is the insurgency of Boko Haram, which radicalized in 2009 with an armed rebellion. This was one of the reasons that drove investors away, as can be seen in Graph 1.

Graph 2: FDI China (World Bank)

Nevertheless, Nigeria still offers too many potential profit opportunities for private investors to be completely neglected. Every investment comes with a risk, and investors should invest with the knowledge that they might lose all their investments. Unfortunately, this does not seem to be different for the companies trying to get a foothold in the Nigerian market. While the biggest companies are often more than welcome in Nigeria, this does not mean they are not taking any risk. Shell estimated that they have been losing over US$1 billion a year as a result of oil pipeline sabotage over the past years and has decided to divest their activities in Nigeria.

Furthermore, smaller- and medium-sized companies have argued that it is impossible to enter the Nigerian market without breaking any of the international corruption laws. This became more apparent with the stricter application of the American Foreign Corrupt Practices Act in 2008, which has made engaging in corruption increasingly risky. For example, the Japanese Marubeni Corporation had to pay a fine of US$54.6 million after it was found they bribed Nigerian government officials to win various contracts in Nigeria. According to the American Foreign Corrupt Practices, any company engaging in corruption can be fined up to 10% of their worldwide revenue, a risk most companies are not willing to take.

Much of Nigeria’s future as a global economic player has been put in the hands of its new president, Muhammadu Buhari, who was elected mainly as a result of his promise to fiercely battle the ever-present corruption. As soon as he got elected, he appointed anti-corruption advisors to start his campaign against the corruption that plagued the country over the past decades. While eliminating corruption and taming Boko Haram are arguably the most important domestic problems to address, the current state of the economy should be another important point of focus if Nigeria wants to become an important economic power.

Even though the Nigerian economy has been slowly diversifying over the past few years, it is still vulnerable as it is mainly focused on oil. In 2009 former president Jonathan Goodluck managed to strike a deal with the militants who were attacking oil pipelines and kidnapping foreign oil workers. The deal includes generous payments to the militants but is set to end in late 2015. This should definitely be taken care of if President Buhari wants to make his country an attractive and safe investment for foreign companies. These are complex issues Nigeria has to deal with and judging by the past it is very unsure whether the country will be stable in the near future. If the country manages to deal with these issues however it would most definitely attract investors and push the Nigerian economic market to new heights.

By Tom de Vroome