Global Value Hunter

Almost without exception, analysts say Nigeria's economy is a basket case. I’m not so sure…

With a few simple (though not easy) fixes, I think Nigeria’s economy could get back on track next year, and even boom, sending share prices up significantly from current depressed levels

Between 2010 and 2015 Nigeria’s economy routinely grew by better than 5% per annum. Driven by large oil price declines, in 2016 it fell into recession. Though growth returned in 2018 to 2020, it was anemic at 2% per year. Then Covid tipped the country into a deep recession, and it’s been a struggle to get back to those historical rates of growth.

Almost any analyst you talk to will say Nigeria’s economy is too far gone. It’s a basket case. And it won’t be revived.

Nigeria Real GDP Growth (% p.a.)

But, a few things were clear on my recent visit to Lagos. Demand for basic goods and services in Nigeria, such as foodstuffs, banking and payment solutions, as well as telecommunications, and building materials, are all growing gangbusters. That’s despite the country’s many macroeconomic and political challenges.

Sales at BUA Foods were up 72.8% in 2021 vs. 2020. At GT Bank they’re up 10.4% for the second quarter of 2022 vs. the corresponding quarter in 2021. MTN Communications has enjoyed five consecutive quarters of better than 20% growth, and Dangote Cement has seen six consecutive quarters of growth above 20% year on year. In four of those quarters, sales growth exceeded 30%.

These are just a few examples of how Nigerian corporates are actually doing very well, in spite of the macroeconomic headwinds caused by soaring inflation (which hit a 17-year high above 22% in August), and the scarcity of foreign exchange in the economy, as the central bank rations it at an artificially low “official” rate rather than letting the market find its level.

For Nigeria to truly flourish, however, three big things – and they are inter-related – need fixing. Only then will the economy have any hope of reaching its full potential. The earliest I see this happening is next year, after the elections.

  1. The theft of – according to some recent reports – as much as half the country’s oil output in the Niger Delta must stop.

The siphoning of oil from oil pipelines into barges in the Niger River delta has reached plague proportions. Shell and other international oil companies have had enough, and this month shut down their production.

Ostensibly this is to “repair” pipelines and associated infrastructure which have been damaged by the bandits stealing the oil. But I get the feeling it’s more than that. If they don’t get a commitment from the authorities that the pillaging will be reined in, it’s hard to see why they will be in any hurry to restart the flow of oil.

Unfortunately, it’s widely known that the security services, which are supposed to be keeping law and order, are the ones involved in much of the theft! So, while it’s simple to see that this needs to be fixed, as I say, it will be anything but easy to implement.

  1. The Central bank needs to discontinue the current foreign exchange rationing system, which has seen a parallel exchange rate market develop that now effectively functions as the main market for most individuals and businesses. There’s no choice for most people but to pay black market rates for dollars, as they simply cannot get access to the central bank FX window.

Along with this, all sorts of hustles have developed. To name just one, people have been claiming their allotted foreign travel allowances, so as to be able to buy FX at the undervalued official rate, where $1 costs about 430 Naira. But once they get the cash, they never actually go abroad to spend it. Instead, they sell it on the black market for an instant 50%+ gain. I know this is possible, as I sold my own USD the same way – at a rate of NGN680 for $1.

So long as companies cannot source foreign exchange to import vital manufacturing inputs, machinery and spare parts, and as long as foreign investors have no guarantee they can ever get their money out of Nigeria again in hard currency, the economy will stagnate

  1. The government needs to find ways to broaden its revenue collection beyond relying on oil-related taxes and levies. At 6% of GDP, the Nigerian government’s tax collections are so low, they currently can’t even pay interest on their accumulated debt, and they must go cap in hand to borrow more and more money.

Almost nobody pays any income tax. The rate of VAT in Nigeria is also far lower than in comparable economies around Africa, and there are many exemptions.  But it’s really the enforcement of the rules, and not the tax rates themselves that are the problem.

I got the impression that with even a few minor tweaks, the level of collection could improve markedly. I was told, for example, that the tax authority doesn’t even publish data on the collection of excise tax from alcoholic beverages. The data doesn’t exist. That tells you the state of affairs.

Right now, Nigeria is collecting less than half the tax and other revenues needed to run the basic functions of government. What the government has done instead is force banks to keep “Special Reserve Requirements” at the Bank of Nigeria (BoN), and then “borrowed” this money from the central bank and spent it, leaving the banks with an I.O.U!

It’s simply not sustainable.

The problem is, while all the above “fixes” are clear as day to anyone with a basic level of intelligence, there is simply no political will at present to get any of them done.

Sadly, that’s because there are some in the political class who are direct beneficiaries of the status quo. The last thing they want is to turn off the taps to the cash that is flowing their way as a result of the current dysfunctional state of affairs.

People are Nigeria’s greatest resource but
the country is taking it for granted resulting in brain drain

Thankfully, given how badly their ruling class rips them off, the Nigerian people in general, at least from what I saw during my interactions with them the week I was in Lagos, are a good natured and optimistic lot. They live in hope for a better tomorrow and truly believe it is possible. Most work hard. And all they want is to be treated with some dignity, so they can get on with improving their lot in life, for themselves and their families.

Sadly, many of the most highly educated Nigerians have been fleeing to the West in droves in recent years, to escape the political mess at home.

The next milestone on the road to a better future is the upcoming presidential election in February 2023. More than one person on my visit said to me, “Well, no matter who gets in, among the three leading Presidential contenders, they can’t possibly be as bad as the current one.” The implication is things can only get better. I guess the real question is, to what degree?

Like most ordinary Nigerians, I have a glass half-full view on things. I have to believe there is hope for better macroeconomic management, and that when this occurs, instead of swimming against the tide with a heavy weight tethered to them, yet still not drowning in spite of it, some of Nigeria’s best businesses may finally get the tide lifting them.

Share prices here have not done badly this year, in a global context. The market is up by double digits in percentage terms, in local currency. Some of the companies I met with on my fact-finding mission to Lagos have been doing even better.

In US Dollar terms however, Nigerian stocks are trading at depressed levels, not seen since the mid-1990s.

But as someone who has a fiduciary duty to my investors, it’s hard to justify buying them now, while the two-tier exchange rate system remains, and foreign investors simply cannot get money back out of the country.

That said, as I have written before, we are sending some money into Nigeria, at exceptionally good rates of exchange. We have dry powder ready to deploy.

Which sectors in Nigeria am I looking to invest in?

I am particularly interested in some of the food and agribusiness companies. Given the population currently doubles with each passing generation, as well as the encouraging policy environment for the localization of more agricultural produce, I think the sector has a bright long-term future.

There are three big, listed players: Flour Mills of Nigeria, Dangote, and BUA. There are also other companies, such as Nestle, operating in the downstream food manufacturing and retailing space.

All are worthy of further investigation. And I will be doing some deep dives over the coming months on these, as well as several other companies that piqued my interest on my recent trip.

If you’re an individual investor looking at Nigeria, it’s hard to go past the Global X MSCI Nigeria ETF (NGE) listed in New York, which I wrote about already. But there are also stocks such as Seplat and Airtel Africalisted in London, which you may want to investigate.

For me, the true gems are listed in Nigeria itself, and that’s where I’ll be devoting my time and energy to further research.

If things work out, I expect to make another trip to Lagos next year, after the election.

Until next time,

Good Investing!

Tim Staermose
Founder, Global Value Hunter
& African Lions Fund Ltd.

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