Nigeria
12 Dec 2018
Ademilola Aluko, Investor services specialist Stanbic IBTC Bank discusses the many investment opportunities in the growing economy of Nigeria
Image: Shutterstock
Nigeria could arguably be one of the largest and most important economies in Africa. It was worth more than $325 billion last year and $1 trillion in terms of nominal gross domestic product (GDP) and purchasing power parity, respectively, and is considered to be an emerging market by the World Bank. With a population that could become the third largest in the world by 2050, the country is often referred to as the “giant of Africa”. GDP growth was 5.6 percent between 2007 and 2015 but has slowed down with the global drop in commodity prices. The country has a high propensity to consume with a growing middle class and a youthful population.
The past year has been one of economic improvement for Nigeria, with Africa’s largest economy managing to crawl back into growth territory in Q2 2017. The Nigerian government has woken up to the need to make the country attractive and lucrative for offshore investors to bring their capital, skills and business into the country. Investment opportunities can be found in any of the sectors in the country, including agriculture, manufacturing, oil and gas, power, the financial sector (money and capital markets).
Agriculture
As of 2017, the size of the agricultural sector of the economy stood at NGN 24 trillion ($78.3 billion) making it the largest economic sector in Nigeria. It contributes about 21.1 percent to the GDP of the country with an annual average growth rate of 8.7 percent. The sector is made up of crop production (88.1 percent), livestock, forestry and fishing (11.9 percent).
The agricultural sector is one of the country’s main foreign exchange (FX) earners and about one-third of all employed Nigerians are engaged in this sector. The sector is largely subsistence and hence has not been able to keep up with the rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products.
In recent times, the government has turned its attention to this sector of the economy attempting to insulate the country against fluctuating oil prices by economic diversification. This is being done through government policies, partnerships and collaborations by the governments as well as various credit schemes and borrowers programmes.
The potential in this sector of the economy cannot be overemphasised as 87 percent of the country’s land mass are arable and Nigeria’s favourable climatic conditions give the sector a competitive advantage in agricultural production. There are a number of profitable investment opportunities in this sector for foreign direct investments.
Manufacturing
With an estimated population of 186 million people, the Nigerian economy has a massive potential workforce as well as consumer base. This is an ideal situation for the manufacturing industry as this population provides adequate potential customer and employees.
Throughout the 1990s and 2000s, Nigeria’s over-reliance on oil export made production from the manufacturing sector to drop significantly. Data obtained from the Manufacturers Association of Nigeria showed that total manufacturing output in the formal sector in Nigeria was NGN 6.84 trillion in 2010. It increased over the following two years by N1.3 trillion in 2011 to reach NGN 8.17 trillion and by NGN 1.65 trillion in 2012 to reach a total of NGN 9.82 trillion. In all three years, the formal manufacturing sector was dominated by the output from the food, beverages and tobacco activity, with NGN 4.93 trillion of output contributed in 2010.
The Nigerian government is eager to expand the manufacturing capability in the country, they are therefore offering incentives for manufacturers that can source their raw materials locally. They also banned importers of a few items that can be sourced locally from accessing the Central Bank of Nigeria FX auction window for FX.
Oil and gas
Since the discovery of oil in 1956, petroleum has played a large role in the Nigerian economy, accounting for 40 percent of GDP and 81 percent of government earnings as at 2017. Nigeria is the 12th largest producer of petroleum in the world and has consistently been a top exporter, and has proven reserves estimated at about 35.2 billion barrels. The investment opportunities in this sector cuts across oil and gas production, refining as well as some indirect opportunities. Nigeria has an abundance of discovered oil and gas resources that are yet to be explored.
The economy’s refining capabilities are not sufficient to meet local demands and not able to meet export demands as well. Although investment in this sector could be risky, successful ventures have proven to be quite lucrative.
Telecommunications
This sector has over the years contributed immensely to Nigeria’s economy. In terms of GDP contribution, the telecommunication sector accounts for about 7.5 percent of the Nigerian economy. The country is one of the largest markets for telecommunication in Africa. The deregulation of the telecommunications sector in 1992 through decree 75 was to allow for private sector participation in the sector and expand the nation’s communication facilities.
The Nigeria Communications Commission (NCC) was established consequently to regulate the performance of the sector. The sector has experienced rapid growth and helps in, for example, easier digital banking services (bank mobile apps) and access to e-learning platforms to Nigerians.
In terms of investment opportunities, Nigeria’s broadband infrastructure has a lot of room for growth and could be an opportunity for investors. The local production of hardware, currently imported, could also be a lucrative area of investment opportunity and the Nigerian telecommunication sector is said to be one of the fastest growing markets in the world.
The sector is open to private participation and operation as it is fully deregulated and has seen a lot of foreign participation. Currently, foreign investment is encouraged via joint ventures and an NCC licence is required to operate.
Financial market
The financial market is segmented into two major markets: the money market and the capital market.
The money market is the market for short-term funds and securities including treasury bills, treasury certificates negotiable certificates of deposits, commercial paper and other funds of less than one-year duration.
The capital market is the market for long-term funds and securities whose tenure extends beyond one year. These include long-term loans, mortgage, bond, preference share, ordinary shares, federal government bonds and industrial loans.
The capital market is a complex institution and mechanism through which intermediate and long-term financing are raised by the government, business and individuals.
Unlike the many money markets which primarily exist as a means of liquidity adjustment, the capital market provides a bridge of transforming saving into long-term investment by using equity bonds, debentures, mortgages and investment stocks to facilitate intermediation.
The capital market is made up of the primary and the secondary market. The primary market, which is also called the new issues market, focuses on the issuance of new securities while the secondary market is where listed/existing stocks are traded.
Nigerian capital market
The Nigerian capital market started with the establishment of the Lagos Stock exchange in 1961 and was in operation until the establishment of the Nigerian Stock Exchange in 1977. Major participants in the market include the central bank, securities and exchange commission, development financial institutions, issuing houses, stockbroking firms, registrars, commercial banks and custodians. The various instruments traded include:
Debt Instruments
A debt instrument is used either by the government or private companies to generate funding. They can be traded in the primary and secondary market with tenure ranging from three to 25 years. Investment in this instrument is low risk hence yields are lower compared to traded instruments. Instruments in this category include federal government bond (sovereign bond, green bond), state bonds, and corporate bonds.
The level of bond floatation in the Nigerian capital market has been encouraging from 1999 to date. Many state governments and companies also have access to the market to raise funds to finance various developmental projects by issuing state and corporate bonds.
Money market instruments
These are short-dated instruments with tenures ranging from one day to one year. It includes securities such as: treasury bills, commercial paper, certificates of deposit and bills of exchange. These are just some of the advantages to investing in the Nigerian money market.
Equities
These are issued by companies and they are also traded in the primary and secondary markets. Ownership of equities translates to ownership of the business hence the investor has certain rights in the company. Due to higher risks the yields/returns are much higher than debt and money market instruments. The Nigerian Stock Market recorded 45 percent returns on investments to investors last year, making it the best performing bourse on the African continent and the third best market in the world.
Derivatives
As the name suggests, the price, function and risk of the derivative depend on that of the underlying assets. The Nigerian market has witnessed a recent rise in the use of derivatives especially in transactions involving foreign counterparties. There has been a significant positive response from both local and foreign investors in Nigeria signalling a new opportunity for Nigeria.
Derivatives can be used to accomplish a lot of risk management objectives due to their extremely flexible contractual nature if properly utilised.
Despite risks, which are characteristic of a typical emerging market economy such as currency convertibility, political instability, security and changes in policies, the potential benefits of investing in the Nigerian economy can produce substantial returns for the investors who have developed practical solutions to mitigate them.
The past year has been one of economic improvement for Nigeria, with Africa’s largest economy managing to crawl back into growth territory in Q2 2017. The Nigerian government has woken up to the need to make the country attractive and lucrative for offshore investors to bring their capital, skills and business into the country. Investment opportunities can be found in any of the sectors in the country, including agriculture, manufacturing, oil and gas, power, the financial sector (money and capital markets).
Agriculture
As of 2017, the size of the agricultural sector of the economy stood at NGN 24 trillion ($78.3 billion) making it the largest economic sector in Nigeria. It contributes about 21.1 percent to the GDP of the country with an annual average growth rate of 8.7 percent. The sector is made up of crop production (88.1 percent), livestock, forestry and fishing (11.9 percent).
The agricultural sector is one of the country’s main foreign exchange (FX) earners and about one-third of all employed Nigerians are engaged in this sector. The sector is largely subsistence and hence has not been able to keep up with the rapid population growth, and Nigeria, once a large net exporter of food, now imports a large quantity of its food products.
In recent times, the government has turned its attention to this sector of the economy attempting to insulate the country against fluctuating oil prices by economic diversification. This is being done through government policies, partnerships and collaborations by the governments as well as various credit schemes and borrowers programmes.
The potential in this sector of the economy cannot be overemphasised as 87 percent of the country’s land mass are arable and Nigeria’s favourable climatic conditions give the sector a competitive advantage in agricultural production. There are a number of profitable investment opportunities in this sector for foreign direct investments.
Manufacturing
With an estimated population of 186 million people, the Nigerian economy has a massive potential workforce as well as consumer base. This is an ideal situation for the manufacturing industry as this population provides adequate potential customer and employees.
Throughout the 1990s and 2000s, Nigeria’s over-reliance on oil export made production from the manufacturing sector to drop significantly. Data obtained from the Manufacturers Association of Nigeria showed that total manufacturing output in the formal sector in Nigeria was NGN 6.84 trillion in 2010. It increased over the following two years by N1.3 trillion in 2011 to reach NGN 8.17 trillion and by NGN 1.65 trillion in 2012 to reach a total of NGN 9.82 trillion. In all three years, the formal manufacturing sector was dominated by the output from the food, beverages and tobacco activity, with NGN 4.93 trillion of output contributed in 2010.
The Nigerian government is eager to expand the manufacturing capability in the country, they are therefore offering incentives for manufacturers that can source their raw materials locally. They also banned importers of a few items that can be sourced locally from accessing the Central Bank of Nigeria FX auction window for FX.
Oil and gas
Since the discovery of oil in 1956, petroleum has played a large role in the Nigerian economy, accounting for 40 percent of GDP and 81 percent of government earnings as at 2017. Nigeria is the 12th largest producer of petroleum in the world and has consistently been a top exporter, and has proven reserves estimated at about 35.2 billion barrels. The investment opportunities in this sector cuts across oil and gas production, refining as well as some indirect opportunities. Nigeria has an abundance of discovered oil and gas resources that are yet to be explored.
The economy’s refining capabilities are not sufficient to meet local demands and not able to meet export demands as well. Although investment in this sector could be risky, successful ventures have proven to be quite lucrative.
Telecommunications
This sector has over the years contributed immensely to Nigeria’s economy. In terms of GDP contribution, the telecommunication sector accounts for about 7.5 percent of the Nigerian economy. The country is one of the largest markets for telecommunication in Africa. The deregulation of the telecommunications sector in 1992 through decree 75 was to allow for private sector participation in the sector and expand the nation’s communication facilities.
The Nigeria Communications Commission (NCC) was established consequently to regulate the performance of the sector. The sector has experienced rapid growth and helps in, for example, easier digital banking services (bank mobile apps) and access to e-learning platforms to Nigerians.
In terms of investment opportunities, Nigeria’s broadband infrastructure has a lot of room for growth and could be an opportunity for investors. The local production of hardware, currently imported, could also be a lucrative area of investment opportunity and the Nigerian telecommunication sector is said to be one of the fastest growing markets in the world.
The sector is open to private participation and operation as it is fully deregulated and has seen a lot of foreign participation. Currently, foreign investment is encouraged via joint ventures and an NCC licence is required to operate.
Financial market
The financial market is segmented into two major markets: the money market and the capital market.
The money market is the market for short-term funds and securities including treasury bills, treasury certificates negotiable certificates of deposits, commercial paper and other funds of less than one-year duration.
The capital market is the market for long-term funds and securities whose tenure extends beyond one year. These include long-term loans, mortgage, bond, preference share, ordinary shares, federal government bonds and industrial loans.
The capital market is a complex institution and mechanism through which intermediate and long-term financing are raised by the government, business and individuals.
Unlike the many money markets which primarily exist as a means of liquidity adjustment, the capital market provides a bridge of transforming saving into long-term investment by using equity bonds, debentures, mortgages and investment stocks to facilitate intermediation.
The capital market is made up of the primary and the secondary market. The primary market, which is also called the new issues market, focuses on the issuance of new securities while the secondary market is where listed/existing stocks are traded.
Nigerian capital market
The Nigerian capital market started with the establishment of the Lagos Stock exchange in 1961 and was in operation until the establishment of the Nigerian Stock Exchange in 1977. Major participants in the market include the central bank, securities and exchange commission, development financial institutions, issuing houses, stockbroking firms, registrars, commercial banks and custodians. The various instruments traded include:
Debt Instruments
A debt instrument is used either by the government or private companies to generate funding. They can be traded in the primary and secondary market with tenure ranging from three to 25 years. Investment in this instrument is low risk hence yields are lower compared to traded instruments. Instruments in this category include federal government bond (sovereign bond, green bond), state bonds, and corporate bonds.
The level of bond floatation in the Nigerian capital market has been encouraging from 1999 to date. Many state governments and companies also have access to the market to raise funds to finance various developmental projects by issuing state and corporate bonds.
Money market instruments
These are short-dated instruments with tenures ranging from one day to one year. It includes securities such as: treasury bills, commercial paper, certificates of deposit and bills of exchange. These are just some of the advantages to investing in the Nigerian money market.
Equities
These are issued by companies and they are also traded in the primary and secondary markets. Ownership of equities translates to ownership of the business hence the investor has certain rights in the company. Due to higher risks the yields/returns are much higher than debt and money market instruments. The Nigerian Stock Market recorded 45 percent returns on investments to investors last year, making it the best performing bourse on the African continent and the third best market in the world.
Derivatives
As the name suggests, the price, function and risk of the derivative depend on that of the underlying assets. The Nigerian market has witnessed a recent rise in the use of derivatives especially in transactions involving foreign counterparties. There has been a significant positive response from both local and foreign investors in Nigeria signalling a new opportunity for Nigeria.
Derivatives can be used to accomplish a lot of risk management objectives due to their extremely flexible contractual nature if properly utilised.
Despite risks, which are characteristic of a typical emerging market economy such as currency convertibility, political instability, security and changes in policies, the potential benefits of investing in the Nigerian economy can produce substantial returns for the investors who have developed practical solutions to mitigate them.
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