When Joseph Rohm, manager of the T. Rowe Price Africa and Middle East fund visited the capital of Nigeria, Lagos, for the first time, he was followed everywhere by guards carrying firearms. The situation is a complete opposite now, he walks the streets absolutely unguarded. “I feel safer in Lagos than I do in Johannesburg,” said Mr. Rohm, who is a native of South Africa.
The big players in the investment industry have created mutual funds and exchange-traded funds that pull most of their money in frontier regions. Mr. Rohm’s fund had begun in 2007 and is one of the older offerings. At the end of April, it had invested three quarters of its finances into countries such as Nigeria, Kenya and Qatar. For the 12 months through June, it had returned 17 percent.According to the UN classification, Nigeria is a middle-income nation with developed transport, communication and financial sectors. It has the second largest stock exchange on the continent as its economy is one of the most developed ones in Africa.
Multinationals that seek the next big growth opportunity should focus their attention toward Nigeria. With a population of approximately 140 million people and a forecasted GDP growth rate of 7.3 percent in 2011, Nigeria has become the consumer market with the highest-potential in Africa, especially considering its increasingly confident and brand-conscious middle class.
A great quality of frontier-markets that Nigeria shares, is that at a time when the Western Economies are struggling, the US exchange rates are sagging and several of the leading emerging markets (such as Brazil, China and Russia) have faltered these years after surging in 2009- is that the growth in Nigeria is stable and is not as much affected by recessions due to its limited dependency on credits.
According to the Central Intelligence Agency, Nigeria holds the world’s 10th largest oil reserves in the world. For a very prolonged period of time, the riches produced unrest, especially in the oil-producing Niger Delta, where residents rebelled against what they saw as too small a share of the profits. Lately, a chain of democratic transitions has stabilized the delta and the country as the government switched form a military dictatorship to a more democratic one. At the same time, policy makers in Nigeria and other similar countries have tamed hyperinflation and liberalized trade. That combination of resource wealth and macro stability acts as a strong attracting agent for investors.
In the Nigerian economic profile, petroleum plays a central role as a major industry as it places itself as the world’s 12th largest petroleum producer. This supports the country as we can see that the industry accounts for almost 80% of the GPD share and above 90% of total exports from Nigeria. Due to the surge in international oil prices during 2007-08, Nigeria managed to reap an annual GDP of $352.3 billion.
Even though the country has had an increasing demand for key industries and has been experiencing rapid economic growth, there are still challenges present for foreign corporations that wish to enter the Nigerian market; unfinished distribution networks and shortages of skilled labor are some of the examples. There are three benefits and challenges that are relevant to those companies that do decide to act on the opportunity of investing in Nigeria: organic/Greenfield entry, join venture /partnership or merger and acquisition. Scenario planning could also act as a helpful tool for corporations looking to assess their options.
SME Investing Nigeria
Nigeria is in a great position for SME investors from all over the world as she records an annuals 6% economic growth. While most investors from Europe and the Northern America have largely been frightened by negative media propagandas of the country in the past, Asian entrepreneurs took the challenge and proved the negative Western press to be incorrect. Today, Asia (mainly China) is the largest group of global SME investors all over Africa. Having mastered the Nigerian economy terrain, they attempt to push new grounds of investment while the Europe and Northern America remain envious of their investment returns. An interesting fact is that most of the early Asian SMEs in Nigeria had begun as merchant traders and retailers of consumer goods. Today, they have expanded to small scale manufacture and food packaging consumer products that are now being exported beyond even the African market. One can find a myriad of success stories that derive inspiration and faith in the Nigerian economy.
A little bit about Africa
Investor interest in the sub-Saharan Africa (SSA) Frontier Markets had high levels of interest before the global financial crisis.
These sub-Saharan countries received considerable volumes of capital inflows, following the steep rise in private capital flows to other emerging and developing countries in the middle of the past decade. Although the flows has have a brief reverse during the climax of the crisis, the low interest rates in more developed countries and a decrease of global risk aversion have renewed interest of investors to scour the globe in search of attractive investment opportunities. A list of following questions are interesting to answer:
· To what extent has the resurgence of global capital flows translated into a resumption of private capital inflows, especially portfolio inflows, to sub-Saharan Africa FMs?
· Do global push factors or local pull factors dominate in steering investor interest?
· Why have some sub-Saharan African FM countries garnered investor interest, while others—including some larger countries—have been sidestepped?
· Which policy options are most suitable for sub-Saharan Africa FM countries to use at this juncture to address any resumption of large capital inflows?
It is important to understand the determinants of and scope for private capital inflows of sub-Saharan African countries for a number of different reasons. Firstly, such flows are increasingly the main source of external financing for many countries in the region. The weakening in the fiscal accounts of most advanced countries because of the crisis also implies that the prospects for sustaining even current levels of official financing are doubtful. Secondly, private flows tend to be more volatile than others. At times flows are large relative to the size of the economy, complicating macroeconomic management.
The main findings are the following:
· The overall trend of capital flows to sub-Saharan Africa’s FMs mirrors trends elsewhere, with strong inflows before the global crisis and a sharp decline during the crisis.
· Postcrisis, and in 2010 in particular, more differentiation is evident. Private investors, possibly still smarting from the global financial losses of recent years, seem to be distinguishing between markets. Thus, country-specific pull factors govern the pattern of flows across regions and countries. In a few of the region’s FMs (Ghana, Mauritius, and, to a somewhat lesser degree, Zambia) portfolio flows picked up markedly in 2010. But in others, there is little sign of resumption in inflows.
· For fixed-income investments, market participants identify yields as the key driver of inflows. Thus, the monetary policy easing that was undertaken by many of the FMs may have reduced the incentives for inflows. Exchange rate volatility is another factor that seems to have played a role in some countries. For equity portfolio flows and foreign direct investment (FDI), a range of other factors contribute to the expected return and riskiness of the investment and influence whether inflows have resumed.
· The region’s FMs outperform other groups—including FMs in other regions, other sub-Saharan African countries, and even select emerging market countries—on a number of indicators of institutional quality, growth prospects, and macroeconomic outcomes. As the contribution of official financing continues to diminish, improvements in many of these areas could help other sub-Saharan African countries to attract private sources of financing for investment and growth.
· Two of the region’s eleven FMs have opted for capital controls in response to the volatility of portfolio inflows, but most countries have continued to rely on macroeconomic policies and macro prudential measures to respond to pressures from current and prospective inflows.
I believe when taking into consideration the position Nigeria holds and the sub-Saharan Africa maintains, including all its nuances, Nigeria can be a very “interesting” market for investments, generally like most frontier markets.
