With economic growth of roughly 5% last year, Nigeria – at first sight – seems to belong to the group of crisis-resistant countries. In fact, the reforms implemented over the past few years – such as the establishment of the oil stabilisation fund and banking sector consolidation – have put Nigeria in a better position to weather the crisis. Nonetheless the global financial crisis has also left its mark on Nigeria and highlighted the economy's weaknesses.

As oil proceeds still make the bulk of total budget revenues, Nigeria was faced with a budget deficit in 2009 for the first time in many years. To finance the gap in its budget Nigeria has been able to resort to savings from the oil stabilisation fund, but this safety cushion has since shrunk to USD 6 bn, from USD 20 bn. But the government kept its debt below 15% of GDP.

Falling oil prices and capital outflows also put pressure on Nigeria's relatively rigid exchange rate regime. In mid-January last year, the government felt compelled to introduce de facto capital controls to halt the currency’s decline (-30% vs. the USD already). Thanks to rising oil prices new central bank governor Lamido Sanusi abolished the capital controls in July last year, and the exchange rate stabilised around a level of 150 naira per US dollar.

Overall, the crisis has shown that Nigeria has learned the lessons of former oil price booms and has been able to avoid a strong increase in government and external debt. In order to make Nigeria even more resilient to future crises, the country should, first, continue to strengthen budget transparency at the state level, secondly, make the exchange rate regime increasingly flexible and, thirdly, promote economic diversification.

Nigeria takes second place among African oil-producing countries

Nigeria still ranks among the fifteen largest oil producers world-wide. However, repeated rebel attacks in the oil-rich Niger delta have led to a considerable drop in oil output over the last few years. In March last year, production fell to its lowest point of the decade at 1.7 million barrels per day (mbd), considerably below Nigeria’s estimated production capacity of around 3 mbd. Hence, Nigeria dropped to second place behind Angola, now sub-Saharan Africa’s largest oil producer. It remains to be seen, though, whether the shift in the ranking will be of a permanent nature. Thanks to a government amnesty, between 8,000 and 15,000 rebels handed in their weapons last summer. As a result, Nigeria's oil production rose to roughly 1.9 m mbd at year-end 2009 and looks set to exceed the 2 mbd mark this year.

Power vacuum resolved for the time being

The fact that Nigeria's president Umaru Yar’Adua was hospitalised in Saudi Arabia for over two months gave rise to calls in early February that power should be transferred to the vice-president to finally end the power vacuum. With the handover of power to Vice President Jonathan on February 9, political uncertainty was held at bay at least temporarily. However, new questions have been raised by Yar'Adua's unexpected return to Nigeria at the end of February. It seems, however, that Jonathan will remain Acting President until Yar'Adua has fully recovered. Should President Yar’Adua be unable to run for a second term in April 2011 for health reasons, this could lead to a major power struggle within the dominating PDP party in the run-up to the elections.

Banking sector at a turning point

Nigeria is western Africa’s main financial center. But last year’s events have added a difficult chapter to the success story of Nigeria’s banking industry that began in 2004. The main reasons for the banking sector crisis were overly lax lending practices, the bursting of a bubble in the domestic equity market and inadequate risk management. Two central bank reports last year revealed the dimension of the problems caused by these lending practices. The reports found insufficient capitalisation at nine out of a total of 25 banks. By means of capital injections and liquidity support to the tune of USD 4.2 bn, the central bank averted a severe banking crisis and is now looking for strategic partners for these banks. So far, mostly South African banks have voiced an interest. Overall, the fact that "tidying up" can now start in the banking sector should be seen as a positive step. As a result, however, credit growth has already slowed noticeably and further consolidation of the banking system is to be expected. Over the next few months, the Nigerian authorities will focus on strengthening the capital base at weak banks, improving banking sector regulation and revitalising lending to the private sector over the medium term.

Equity and bond markets remain on growth path

To prevent new external debt accumulating after the debt relief of 2005/06, the Nigerian government has so far refrained from issuing an international bond. But despite its S&P country rating downgrade to B+ last August the government in November said it intended to issue a 10-year naira-denominated eurobond this year. Its primary goal is to introduce a benchmark for further international corporate bonds. Unlike the international bond market, the domestic market has registered continuous growth for a number of years. Since 2005 the volume of domestic government bonds has tripled from USD 5 bn to USD 15 bn.

Outstripped only by South Africa, Nigeria has the second largest equity market in sub-Saharan Africa by far. Roughly 200 companies are listed on the Nigerian stock exchange, with banks accounting for more than half of total market capitalisation. After soaring from 2004, stock prices peaked and started to fall in March 2008. In euro terms, Nigeria's share index reached its lowest point in December 2009. The strong recovery in the equity market seen in many other countries last year has so far failed to materialise in Nigeria due to the banking sector problems.

Overall, Nigeria remains a high-potential frontier market thanks to its abundance of natural resources, its large domestic consumer goods market and its progress in developing the financial market.

Marion Mühlberger (+49) 69 910-31815

 

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