Nigeria has been facing tough times for over a year now. While the outlook for political stability is more favorable today than it was in September of 2014, other challenges are weighing heavily on the country, affecting investment decisions and requiring multinational companies to adapt business strategies.
How it all began
Nigeria’s woes began in July of last year when the country was hit by Ebola. While Nigeria was only marginally affected, and the epidemic was speedily contained, it left a dent on the country’s new-found fame as Africa’s largest economy and new bright spot for global investment. Then, when investors were comfortable with resuming their expansion plans, global oil prices began to tumble and sent shock-waves through commodity-exporting markets. Simultaneously, Boko Haram stepped up terrorist activity and Nigeria was entering an election year in an environment of heightened social tensions.
It could all have ended badly, so investors preferred to wait and see how the situation would evolve. To the surprise of most onlookers, it ended well. Nigeria witnessed a landmark political transition in March 2015 as the country’s main opposition candidate was peacefully lifted into power. Nigerians were elated that their democracy had taken an important step forward and hopeful that the new president, Muhammadu Buhari, would not just reduce corruption and defeat the Boko Haram insurgency, but that he would also be the right man to lead the country through a period of subdued economic performance.
Where we are today
Expectations for Buhari are high and many say that Buhari is doomed to disappoint. Still, most Nigerians remain convinced that they are better off under Buhari than they were under the previous government despite currency depreciation, rising prices, higher unemployment and falling oil prices.
Buhari marked 100 days in office recently. As he still hasn’t announced a cabinet, cries are getting louder for him to appoint key decision makers so the country can get back to business as usual. Despite running without a cabinet, the new government has already made notable achievements.
Buhari made drastic changes to government agencies in charge of the country’s oil and gas sector. He sacked the entire board of the Nigerian National Petroleum Corporation (NNPC) and also banned 113 oil vessels that were accused of being involved in illicit activities. Attempting to halt the mismanagement of public funds, Buhari instructed all federal government institutions to direct all public revenue to one single account in the Central Bank of Nigeria. He also strengthened the country’s Economic and Financial Crimes Commission to prosecute those accused of graft.
These moves have already improved transparency. The country has also witnessed a dramatic uptick in power availability (from 1,962 MW to 4,396 MW), primarily as a result of an increase in gas supply due to Buhari’s stronger efforts to prevent vandalism and sabotage of thermal plants. The military has also made significant gains against Boko Haram.
Despite all these improvements, investors are getting jittery. The currency is still widely believed to be overvalued and the central bank is trying out some unorthodox monetary policy measures to try and keep the naira’s value of 198 to the USD. However, many doubt their effectiveness and most expect the naira to lose another 10 to 15 percent or more. In response to the central bank’s protective measures, Nigeria was voted out from JP Morgan Chase local-currency emerging markets bond index, which further undermines investor sentiment and will see more capital outflows.
The lack of a fully operational cabinet is also slowing down economic activity across the country. As ministers are not yet in seat, government spending has slowed down, undermining economic activity. Buhari may be right in taking his time, and it is by no means unusual practice for a new government to delay the announcement of key positions. Buhari’s most precious political capital is his firm stance against graft, and it is crucial that he finds people for the country’s top jobs that don’t only comply with this image, but also have the right skill sets. Buhari is also likely to look outside the political elite to find suitable candidates.
As a retired military general, Buhari has largely remained within his comfort zone by focusing on tackling the Boko Haram insurgency and instilling discipline in government agencies. But he will need strong support to get the economy under control, as tackling inefficiencies will not be enough to weather Nigeria’s worsening economic storm.
What multinational companies should expect next
- Appointments: Buhari is likely to appoint his cabinet and other critical positions throughout the next few weeks. The cabinet is expected to be made up of technocrats, high-profile politicians that supported him during his campaign, selected members of his party, the APC, as well as some military personnel. Once everyone is in seat, government spending is expected to pick up which will fuel economic activity somewhat; however, Buhari’s new cabinet will have to focus on implementing a drastic economic reform program and outline a clear direction for investor sentiment to improve.
- Economic outlook: Economic growth has slowed to 2.35 percent in Q2 from 3.96 percent in Q1. FSG expects Q3 and Q4 growth to come in around 2.5- 3.5 percent, lowering Nigeria’s GDP growth expectations markedly to around 3.0 percent YOY from 4.1 percent previously forecasted for 2015. While the subdued global outlook and its impact on low oil prices is affecting government spending, rising prices and the weak Naira also hurt business investment. The difficulty in getting access to USD as a result of the central bank’s attempt to protect the currency is limiting the ability of businesses to import critical goods needed for consumption and for manufacturing. As the global and local economic environment worsens, business investment will slow down further.
- Consumer and business spending will be subdued: Optimism following the March election will sooner or later give way to a more subdued sentiment as more consumers feel the pinch. Some low-income consumers could fall back into poverty as inflation accelerates. The middle class will be more price-sensitive and luxury spending could decline as the elite is forced to adapt to a new normal caused by low commodity prices. As competition increases, more companies will vie for a share of limited consumer spending. Consumers will shift habits and buy local products, or cheaper alternatives such as Chinese imports, whenever possible. This will benefit companies that don’t rely on imports for production.
- Nigeria is too large to be ignored: Despite this subdued outlook, Nigeria remains Sub-Saharan Africa’s largest economy and the fundamental drivers supporting growth, notably economic diversification, remain on track. Companies believing in the opportunity that Nigeria and the wider SSA region represent over the next several decades understand that business success depends on executing long-term investment plans and not letting short-term disruptions, such as currency volatility, derail their expansion plans. However, it is time multinational companies adapt their business strategy. As the currency loses value, it is a good time to invest and acquire cheaper priced assets, especially for local manufacturing, in order to expand market share and to be positioned for growth once the economic environment improves.