The positive case for investing in Buhari’s Nigeria

Nigeria is often viewed as a risky bet by investors seeking fast returns on the continent.

Despite being Africa’s largest economy, the country lacks reliable power, roads and water and has a notoriously unpredictable business and policy climate. The recently re-elected government of President Muhammadu Buhari has introduced a series of protectionist economic policies, including currency controls and import restrictions. During the campaign, the government gave few signs that it is prepared to change tack.

Yet despite manifold challenges, Nigerian business leaders on a UK charm offensive insisted that the emerging technology, banking and electric power sectors present “endless” opportunities to investors.

“Investors focus too strongly on the risks, often missing opportunities to turn some of the country’s key challenges into opportunities,” says Renaissance Capital’s Nigeria CEO Temi Popoola, speaking at a London meeting of investors in Nigeria on Wednesday.

“You see lots of indigenous locally owned companies who are growing capacity and having decent returns on capital.”

One example is Nigerian oil and gas company Seplat Petroleum Development, who deliver 30% of gas power in Nigeria and are dual listed on the London and Nigerian stock exchange.

Based on their successes in Nigeria, Seplat’s founder and CEO Dr Bryant Orijako said they are expanding operations in the gas sector where they have invested heavily in drilling and acquisition.

On Wednesday Orijako said they had taken a final decision to develop gas fields in the country’s Imo state and would raise $700 million for investment in partnership with the state-owned Nigerian National Petroleum Corporation.

Seplat is hoping to tap in to the electricity demands of industrial development by turning gas into electricity and focusing on the lucrative mid-stream sector, according to Popoola.

“Mid-stream in the oil and gas sector is a remarkable area for growth and investment. Infrastructure deficits in Nigeria remain immense and one of the ways to unlock that is really investing in mid-stream gas to power.”

He said opportunities also abound to invest in Nigeria’s budding tech sector, where startups are finding solutions to local problems ranging from a lack of healthcare to scaling up the country’s financial sector.

“There’s a technology revolution occurring today, there’s a lot of need for infrastructure around this. Financial services, consumer lending and pay day lending, and using tech to scale up lending, accounts and deposits – we think this is massive,” he said.

Reimagining the oil economy

For the last thirty years Nigeria’s economic growth rate has been tethered to the ebb and flow of global oil prices.

Since 2015 the falling price of crude oil, which provides 90% of Nigeria’s foreign exchange earnings, has left the country short of cash for investment.

To bridge the gap the government needs to industrialise their economy by doing three things, Renaissance Capital’s analysts say.

The first is to invest in human capital and education in order to get literacy levels from 60% today to the 80% range.

They also need to boost investment in electricity per capita to ensure the country has the infrastructure to boost internet penetration and power homes, businesses and corporations.

Shell Nigeria’s managing director recently described Nigeria’s energy gap as disgraceful, saying it leaves some households and SMEs with less than four hours of electricity daily.

Thirdly Nigeria’s industrialisation process will depend heavily on capital investment from local companies such as Seplat investing in infrastructure, and sectors that diversify the economy away from cheap oil.

“Nigeria cannot continue to depend excessively on oil. We see the diversification narrative in which oil remains the platform around which that would happen. And gas development is key.”

“[Economic diversification] is one of the areas that the government needs to do as much as it can to address in order to get investment up from 13-14% of GDP to at least 25%,” Popoola notes.

“The rates of investment in GDP in Nigeria remain massively low, and in the absence of that its very difficult to achieve the growth rates that one would like to see happen.”

Countries without oil resources such as Ethiopia have an investment rate over 35% of GDP and a growth rate of 8-9% a year. Nigeria’s investment rate is 13-14% of GDP, growing at just 2% a year.

Looking ahead

As Nigeria looks to the future, major political events will also be key to determining the rate of capital flows to the country.

With Nigeria’s president Muhammadu Buhari is re-elected for a second term, observers will be watching his next moves closely.

His choices for the composition of his new administration, which officially begins work on 29 May, will be crucial to encouraging investor confidence, Popoola says.

“Everyone is keen to know what the quality of the cabinet is and to see if the lessons have been learned from the last 4 years.”

The choice of the central bank governor on June 2 will also determine any changes to the country’s forex rate, which has fluctuated since 2015 to counter the impact of falling prices for crude oil.

“Everyone will be keen to see whether his tenure is renewed and or whether there will be someone else at the helm.”

Political developments aside, Moscow-based investment bank Renaissance Capital say they have a positive outlook for Nigeria:

“We’ve got a positive outlook. There’s been an overlooked economic miracle in the last five years and we’ve been trying to figure out what happened,” says Charlie Robertson, the bank’s global chief economist.