On June 15 Nigeria’s central bank relaxed its currency’s dollar peg. The relaxation saw the Naira depreciate by at least 69% against the US dollar to the current levels. in the money with NESBERT RUWO & JOTHAM MAKARUDZE
While this move was applauded by many, the challenges facing the oil-dependent Nigerian economy have been compounded by the decline in oil price which has generated difficulties for both foreign and domestic businesses as the country slides towards recession for the first time in more than two decades. This has cost Nigeria its top spot as the largest economy in Africa in dollar terms, with South Africa now back on top. However, investors put more weight on growth prospects than relative size of economies when making investment decisions.
One could argue that this ranking drop could be a technicality, however, there is a worrying trend that’s happening. Nigeria is experiencing an exodus of companies, with some preferring to base their operations in Ghana. Should this trend not be reversed, it could take more time for Nigeria to reclaim the top spot from South Africa, a country which boasts the most developed infrastructure and sophisticated economy on the African continent.
Without us belittling the prospects of the Nigerian economy, its massive population and the scope for infrastructure development and urbanisation presents mouth-watering opportunities for investors. However, the question that investors consider in a risk-return framework is whether the returns from investing in that economy are sufficient to compensate for the inherent risks. With companies exiting the country, the risk-return matrix seem to be skewed towards unnecessarily higher risk. Maybe for now.
Companies in Nigeria are facing a high cost of production resulting from inadequate infrastructure, and low manufacturing capacity utilisation. Commercial centres continue to experience heavy traffic congestion, creating costly delays. The rail and passenger transit systems remain underdeveloped to meet the demands of a populous nation.
Last week, the Manufacturers Association of Nigeria (MAN) noted that at least 272 manufacturing firms had been forced out of business with some of the affected manufacturers relocating to neighbouring countries, mainly to Ghana. This came after foreign exchange restrictions on 41 items were instituted by the Central Bank of Nigeria (CBN) last year effectively banning the importation of these goods. MAN noted “conflicting policies” coming from the CBN and the Federal government and lamented that the current operating environment was “too harsh” for companies to continue operating in the country. MAN points out that “about $10 billion of manufacturers’ funds were stuck in foreign countries” because the owners are losing confidence in the economy.
Even major airlines are shunning Nigeria’s airspace. Earlier in the year Iberia, a Spanish airline, and United Airlines exited the Nigerian aviation market due to inability to repatriate their revenue. Currently, most of the international airline operators have their revenue tied up in Nigerian banks. British Airways and Emirates have said they are facing difficulties repatriating fare revenues.
Companies are choosing Ghana or as far afield as South Africa where there is relatively stable power supply and advanced infrastructure facilities. Ghana is proactively incentivising foreign direct investments through friendly business environment and incentives such as 15-year tax holidays, free land and other policy initiatives.
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Companies like Dunlop, Michelin and many other multinationals have chosen to relocate their investments to Ghana and South Africa. Cadbury Nigeria, Unilever and the International Institute of Tropical Agriculture have cut back on their employment levels citing high cost of production, decaying infrastructure and weak global growth.
Nigeria has proved to be a challenging environment for a number of successful South African companies that attempted to tap the lucrative Nigerian market with many having packed their bags and gone back home. These include Truworths International, Clover, Sun International, Woolworths, and Tiger Brands. Truworths bemoaned “dilapidated infrastructure, complicated red tape and expensive rent” made it “impossible to do business.” For Sun International, the challenges included insecurity as well as ongoing shareholder disputes. As early as three years ago, Woolworths left Nigeria citing high rent and duties as well as logistical difficulties in marketing to Nigerian consumers.
But it’s not all doom and gloom. Some companies still remain and are making it. The Nigeria-South Africa Chamber of Commerce says least 100 South African companies were operating in Nigeria last year. These include South African companies MTN (despite its fight with the regulator over a massive $5,2 billion fine), Shoprite, Mr Price, MultiChoice among others. In January, Coca-Cola acquired a 40% stake in Chi Limited, Nigeria’s largest juice maker. In April, consulting firm BCG opened its first office in Nigeria.
It is important for Nigeria to realise that unless it deals with the fundamental issues driving investments out, foreign direct investment will slow down or even reverse. Apart from the resource curse, a fundamental push factor for investor exodus has been the inadequacy and inefficiencies in the country’s infrastructure. To deal with these inefficiencies, Nigeria requires significant investment in infrastructure. The country requires about $3,05 trillion dollars to implement the National Integrated Infrastructure Master Plan to raise the stock of infrastructure to 70% of GDP by 2043 from the current level of 20% to de-bottleneck the infrastructure inefficiencies.
What we glean out of the Nigerian experience is that despite lucrative opportunities, if the business environment is not conducive and supportive, capital flows out to relatively accommodating destinations. In as much as Zimbabwe has so much potential for rebuilding and recapitalising its economy to become a bread basket case again, the political environment doesn’t seem to be conducive for attracting foreign capital or long-term diasporan investment capital. We also find that investing in infrastructure is very key in supporting the growth of an economy. Zimbabwe is in desperate need for social and economic infrastructure investment and this should be a key aspect in any economic development plan the country will have. Nesbert Ruwo (CFA) and Jotham Makarudze (CFA) are investment professionals based in South Africa. They can be contacted on [email protected]
