A SUPPLEMENT TO EUROMONEY/APRIL 1999: NIGERIA
A step in the right direction
In the past, for every step forward, Nigeria has taken two steps back. The difference now, say Lagos-based bankers who describe themselves as “cautious optimists”, is that the recent presidential election suggests that Nigeria is finally making some progress.
Barring any monumental upheavals, the country will on May 29 return to civilian rule for the first time since 1993. In February’s presidential election, the Peoples Democratic Party (PDP) led by the former military ruler General Olusegan Obasanjo, amassed almost 63% of the vote. Even allowing for a low turnout and some jiggery-pokery in the management of the election, this would appear to leave the Obasanjo administration with a clear mandate.
Vitally, the transition to civilian rule will allow Nigeria to continue to shake off a reputation it developed by the mid-1990s for being a virtual pariah in terms of international diplomacy. Bankers say that the changes in Nigeria have fuelled unprecedented interest in the market on the part of overseas investors. One Lagos banker highlights the new president’s proactive approach: “I think it was significant and very constructive that after the election Obasanjo’s travel plans took him to several African economies as well as to some key trading partners in Asia and Europe.” Philip Ihenacho, head of corporate finance, capital markets and research at Afrinvest in London comments: “The increase in the number of enquiries we have had from emerging fund managers compared with this time last year has been dramatic – worryingly so, because the economic fundamentals have not been tackled yet.”
Bode Agusto, chief executive of the Lagos-based financial consultancy and ratings company, Agusto & Co, stresses that Nigeria is at an economic crossroads and, in a presentation to a local bank shortly after the election, offered three possible future scenarios. The most likely of these, he says, would see Nigeria “not isolated but [enjoying] little integration with the world economy”. This would be characterized by an “acceptable transition to popular democracy” accompanied by a weak political opposition, an improving rule of law, fewer violations of human rights and no diplomatic or economic sanctions. Meanwhile, there would be an increase in foreign direct investment into exploration and production and utilities, limited privatization, an IMF agreement and debt rescheduling, fiscal discipline, stable output per capita and “income per head below the poverty line but growing”.
Shell Nigeria was quoted in February as saying that the incoming government would inherit “the country’s worst economic crisis since independence nearly 40 years ago”. However, many see this as overly pessimistic, with the outgoing military administration having already established a platform on which to build.
According to Dick Kramer, chief executive officer of Strategic Research and Investments Nigeria, the country’s 1999 budget “squarely faces a looming deficit, thereby keeping inflation down to low double-digit levels”. Importantly, the budget saw the belated elimination of Nigeria’s so-called “official foreign exchange rate”. This had fixed the naira at an overvalued rate to the US dollar of N22:$1 for certain government transactions, while the prevailing market rate had been over N80 to the dollar. Kramer notes: “The official rate benefited very few people at the expense of the entire nation. It was the biggest single deterrent to external financial support. It should have been done [abolished] years ago.”
Aside from the latest budget, perhaps the most constructive legacy of military governments when power is handed over on May 29 is the economic plan known as Vision 2010. This was originally drawn up in November 1996 and aims to establish a much-needed dialogue on economic policy between the public and private sectors. “Democracy is clearly a very important first step towards achieving the targets set out in Vision 2010,” says Godwin Obaseki, managing director of Securities Transactions & Trust Company (SecTrust), “because it at least means that the voice of the private sector will be heard at a decision-making level. A filtration process is already taking place which is putting the demands and the requirements of the private sector on to the political agenda.”
Vision 2010 is nothing if not ambitious. It calls for an economic environment in which the economy is growing at an annual average rate of 10% with inflation contained at below 5%. It also envisages a manufacturing sector accounting for about 24% of GDP (compared with 11% in 1998), with the share of oil declining to below 20% (against 30% now), and crude oil’s share of total exports falling from 97.4% in 1995 to 62% in 2010. Vision 2010 also foresees per capita income rising from around $300 in 1998 to $1,600 by 2010, ensuring that by then “Nigeria would have returned to the rank of middle-income countries”.
Some of the other targets detailed in the Vision 2010 blueprint are seen as pure flights of fancy. These include the “virtual full employment of all able-bodied persons” and the aim that “by the year 2010, Nigeria should be a corruption-free society”.
For the time being, these goals remain something of a pipe dream. Over the immediate term, as Investment Banking & Trust Company points out in a recent analysis, Nigeria’s economic fundamentals will remain weak. “With greatly reduced earnings from petroleum, continued difficulties for manufacturers from poor infrastructure and generally increased import duties, and a lack of specific growth-inducing policies, GDP is unlikely to grow beyond the 3% minimum target that the government has set itself for 1999,” it notes. “In addition, inflation is likely to exceed 15% this year, given the continued expansion of the money supply and the envisaged recourse to a large fiscal deficit which might be financed largely by the Central Bank.”
But Nigerian bankers are hopeful that lasting democracy will give the country a better than even chance of at least reaching some of the goals outlined in Vision 2010. One crucial by-product of the new government will be that the Central Bank of Nigeria will be much freer to implement potentially unpopular measures aimed at maintaining price and currency stability, which the bank’s deputy governor, Victor Odozi, describes as the bank’s number one priority. “It is of paramount importance because it will allow us to open up discussions about debt relief and lay the foundations for sustained economic growth.”
Democracy, Odozi adds, will make this process less traumatic than it was in the past. “I don’t think any central bank can say it is completely independent,” he says, adding that he prefers to describe its status as “autonomous”. “The mandate of the central bank is determined by its political masters,” he says, “but that does not mean that the bank needs to act against its better judgement by being too accommodating in terms of monetary policy. I hope that we have men of character and men of courage who would be prepared to exercise the ultimate option of stepping down on principle if the Bank is not allowed to select the appropriate instruments to ensure that we can maintain price stability. That was not possible under the military regime.”
Bankers warn, however, that it would be a mistake to assume that as of June 1 the country can look forward to a fast-track ascent towards speedy growth and poverty alleviation. Recent activity in the capital market should not be taken as a signal that the floodgates have suddenly been opened for a surge in industrial investment, but rather that the economic outlook for Nigeria is no longer quite as bad as it was a year or so ago.
Landmark transactions announced in recent months have included a record-breaking rights issue from Nigerian Bottling Company and an unusually long-term, six-year bank facility for West African Portland Cement (WAPC), both of which raised capital earmarked at least partially for investment. “I think both investments need to be seen as defensive measures,” says one Lagos-based banker, “rather than as indications that demand in this market is on the point of exploding. WAPC, for example, has urgently needed to rebuild one of its cement plants for the last two to three years, but it has deferred making the investment until it had sufficient confidence in the outlook for the political and economic climate in Nigeria.”
Beyond these transactions, there have been other indications that political change is encouraging companies to channel increased levels of investment into the country. The largest project, approved in mid-March, is the planned $1.8 billion gas plant being constructed in the Niger Delta by Nigerian Liquefied Natural Gas (NLNG). This forms part of a wider $8.5 billion investment programme aimed at increasing oil output by almost one third, or by 600,000 barrels a day, over the coming 10 years.
While the approval of such projects will clearly be beneficial to the Nigerian economy, the key to lasting prosperity will be the diversification of the economy away from the capricious oil sector. Central bank governor Paul Ogwuma says that the government has already taken a number of initiatives aimed at diversification, but that Nigeria can scarcely hope to expand into areas such as high technology. Instead, diversification will need to be in primary sectors such as mining and agri-business, both of which have been severely neglected in the past. As Afrinvest noted in a bulletin on the economy published in 1997, Nigeria is very rich in minerals with “significant deposits of tin, zinc, iron ore, coal, limestone, granite, gold and kaolin, which have remained virtually undeveloped”.
Attracting private sector investment into these sectors needs to be a key priority if Nigeria is to wean itself away from its reliance on crude oil, and already the indications are positive. The Lagos-based Merchant Banking Corporation (MBC), for instance, is now doing preparatory work on the privatization of the Nigerian Coal Corporation, with a spokesman for the bank saying that given the high quality of Nigerian coal, it should be easy to entice private sector investors.
Others say that if Nigeria is to attract private sector investment into all areas of the economy, it should start to look at macroeconomic reforms. Agusto, for example, suggests that the government should waive corporate income tax for new companies for a 10-year period. “This would have no material impact on central government finances because less than 5% of the government’s revenue comes from taxes in any case,” he says. “But because it is absolutely clear that money goes that much further in the hands of the private sector than it does if it is managed by the public sector, this would be a way of reflating the economy and creating jobs without recourse to printing money.”
Another important variable affecting Nigeria’s economy in the medium term is the future price of oil. But that does not necessarily mean that economic stability and prosperity need be hostage to a higher oil price.
Apologists for Nigerian economic policy since independence say that in recent years the country has been the victim of massive ill-fortune arising from plummeting oil prices, which costs the country an estimated $600 million for every $1 decline in the price of a barrel of crude. As a result, they say, donors and creditors should recognize as much by stepping up aid flows and rescheduling or even writing off large chunks of the country’s external debt, estimated by the IMF to be in the region of $28.6 billion.
More forward-looking pragmatists, however, argue that far from being a stroke of bad luck, a depressed oil price is, paradoxically, precisely the medicine Nigeria needs to enforce far-reaching economic reform.
As Lagos-based Asset and Resource Management (ARM) notes in a recent research bulletin: “Perhaps the most significant impact of the low oil price will be to encourage Nigeria to diversify its earnings stream from the oil sector through adjustments to the economy.”
Ihenacho at Afrinvest agrees. “In times of high oil prices previous administrations could afford to be sloppy about corruption and continue to support inefficient parastatals [state-owned assets] and other white elephants,” he says. “Low oil prices mean that they will be forced into privatization and extensive economic reform.”
Several Lagos-based bankers echo this view. “We had a $12 billion windfall as a result of rising oil prices during the Gulf War, but nobody seems to know what became of it,” says one. “Higher oil prices are of no value whatsoever if none of the revenue ends up with those who are supposed to benefit from them.”
If low oil prices are to benefit Nigeria, more capital must emerge from the country’s vast underground economy to contribute to the reconstruction of its crumbling infrastructure.
Nobody can reliably gauge the precise size of Nigeria’s so-called “informal” economy, although it is plainly visible on every street in Lagos, where hawkers offer passing motorists every imaginable item ranging from newspapers to toilet seats. At the central bank, Odozi reckons that the underground economy may represent as much as an additional 40% of official GDP. If even a modest proportion of this can be channeled into the formal economy in support of privatization, it would represent a significant stride in the right direction for Nigeria.
New-generation banking
A new generation of Nigerian banks have revitalized the sector. But with maturities still painfully short, there is room for much improvement
The structure of the Nigerian banking industry has changed radically over the last 13 years. Extensive deregulation and liberalization during the late 1980s, which fostered privatization in the 1990s, put an end to the days of nepotism, corruption and rank inefficiency.
In 1986, there were a total of 36 commercial and merchant banks in Nigeria. Over the following five years this had swollen to 120 banks and more than 400 finance companies. As a 1999 Harvard Business School report points out: “Many of the new bankers and finance company owners were not bankers at all, but opportunistic businessmen. These entrepreneurs hoped to make quick financial profits by capitalizing on the dual exchange rates and by borrowing money from their own new banks for their own investment purposes.”
The inevitable result was that several of the so-called new-generation banks collapsed, reflecting an explosion of insider debts. More still limped on, leading the local rating agency, Agusto & Co, to estimate that of the 100-plus banks operating in Nigeria in 1996, no more than 33 could be described as healthy.
But while many of the new banks were poorly managed and undercapitalized, many more were highly efficient institutions. These banks succeeded in shaking up the entire sector by introducing new products, technological innovations and improved customer service. At one such bank, Guaranty Trust Bank (GTB) in Lagos, deputy managing director Tayo Aderinokun explains that many of the organization’s original founders had returned to Nigeria after successful careers in the US in the 1980s. “We had first-hand experience of how banking was done in the US and we applied those same principles here,” he says. “Some people argued that when 100 or so licences were issued between 1986 and 1990 it was too many, too soon. Of those 100, 40 or so are now dead, but that still leaves 60 which are still in business, of which three or four are really outstanding organizations.”
A 1998 report published by Agusto & Co charted the performance of 38 new-generation banks – 20 commercial banks and 18 merchant or investment banks – and provides quantitative proof of the newcomers’ success. It found that new-generation players control about 40% of assets and 39% of local currency deposits. New banks also enjoy a 47% share of loans and a 45% share of the industry’s net earnings.
The new players’ intrusion into a traditional captive market has forced the older Nigerian banks – and especially the three biggest: First Bank, Union Bank and United Bank for Africa (which between them enjoy a 40% market share of deposits) – to improve their efficiency, upgrade their systems and focus on shareholder value.
At United Bank for Africa (UBA), which was privatized in 1994, assistant general manager of strategic management, Peju Adebajo, admits that one of the underlying factors in her bank’s success was the painful changes it was forced to make as a result of heightened competition. This involved a drastic reduction in the bank’s workforce from around 8,000 in 1994 to nearer 4,000 today. “Many of the new banks which were licensed failed,” she says, “but those which stayed the course ate into our deposit base.”
Banking reform continues. Banks were given until the end of 1998 to increase their capital to a minimum of N500 million ($5.75 million), although 48 banks out of 120 failed to meet this requirement, suggesting further liquidations over the coming year or so.
At the central bank, deputy governor Victor Odozi insists that the shake-up has left the industry leaner, fitter and stronger. “More than 70 banks have met the minimum capital requirements,” he says, “and of those about 50 are also adequately capitalized on the basis of risk-weighted capital adequacy. 15 or so are probably still under-capitalized and technically insolvent and we are in the process of reviewing which banks can be described as distressed and where we need to apply the ultimate sanction of revoking their licences. But we have gone beyond the fact-finding phase of restoring the strength of the banking industry and we are now fine-tuning.”
Fine-tuning the sector, Odozi adds, also encompasses encouraging more foreign banks to enter the market, reversing a process that during the 1970s saw a number leave the country. “Foreign banks will bring additional skills and expertise to the sector,” he says, “and engender more competition locally.” The first foreign bank to return to Nigeria will be the UK’s Standard Chartered, which for many years held a minority (9.9%) stake in First Bank of Nigeria, which was sold to the Nigerian public in October 1996.
One of Nigeria’s most pressing financial needs is for longer maturities. “It amazes people in this country when they read about 30-year bonds in the Euromarkets paying a fixed rate of 6%,” says one banker in Lagos. “Almost nobody here talks about five-year financing or even two-year bonds. In this market you’re lucky if you can secure one-year funding.”
Forward-looking bankers view this as a serious shortcoming. “A critical priority needs to be the development of medium-to-long-term funding,” says Adebajo at UBA. “At the moment we have no proper yield curve because the market has not developed beyond 90 days, which is killing the manufacturing sector here.”
Odozi at the central bank says: “I don’t think banks can be blamed for not lending long-term funds. But what we are trying to do at the central bank is to ask them to focus more on mobilizing longer-term deposits rather than reducing the tenor of their loans. The only way to ensure that people have a longer-term perspective is to generate confidence among savers and manufacturers, and to do that we need to restore macroeconomic stability.”
Even at the short end of the maturity spectrum the cost of funds for Nigerian manufacturing companies hoping to access development capital remains prohibitively expensive. “T-Bill rates today are around 15%,” says one, “whereas short-term bank lending rates, even to blue chip companies, are closer to 25%, which is ridiculous because these companies are probably much better credits than the government itself. Spread levels are outrageous.”
For a lucky few, long-term financing is gradually being made more available, and is spreading from the oil sector into other industries. Bankers in Lagos point to the recent club loan provided by a consortium of 12 banks for the equivalent in local currency of some $91 million to West African Portland Cement (WAPC) as an example of an exception, rather than a rule. This facility, signed in early March, has a maturity of six years. Bankers say that while a transaction of this kind is fundamentally encouraging, borrowers with the clout of WAPC are few and far between.
Providing longer-term funding for industry is one way in which the Nigerian banking sector could contribute to economic development. Another is to channel more resources into promoting basic retail banking services. One Lagos-based banker estimates that no more than one million Nigerians have bank accounts. Some view this as an exaggeratedly low figure, but most agree that the country remains vastly under-banked. “This is a country with more than 100 million people,” says one, “and yet we have no more than about 80 banks with fewer than 2,000 branches between them.”
The potential for expanding retail banking services is clear. But bankers argue that for the industry to harness this potential it will have to take a number of tough measures. One of these would be to abandon the so-called commission mechanism – “I call it a tax,” says Agusto – whereby depositors are charged N5 for every N1,000 debited from their accounts.
Edging towards privatization
The outgoing administration had hoped to sell stakes in 37 companies before it hands over political power to the new government at the end of May and a number of banks were mandated by Nigeria’s Bureau of Private Enterprise (BPE) in February to advise on the ambitious privatization programme. However when a story was published in early March by the daily newspaper, This Day, suggesting that the government had “nullified” the appointment by the BPE of all privatization advisers, the banks were thrown into confusion.
The article caused concern for the advisers. “We were surprised to see the newspapers announcing that the advisory mandates had been annulled,” says Tayo Aderinokun, deputy managing director of GTB, “which is why we rushed to [the capital] Abuja to ask the board of the BPE what was going on. We were assured that the report was untrue, that the final list of advisers had been approved by the head of state and that the privatization process was officially on.”
In spite of the confusion, bankers appear to be united in their belief that widespread privatization is inevitable. They base their conviction on the fact that, in terms of efficiency, Nigeria’s state-owned assets – or parastatals, as they are known – have now reached rock-bottom.
No visitor to Nigeria could disagree. Power cuts are so frequent that Lagos is regularly plunged into darkness. Telephone lines are so erratic that it is sometimes easier to visit business contacts in person, braving chaotic traffic jams. Roads are also in an advanced state of decay, security at domestic airports is conspicuous by its absence, and hotels outside the modern capital at Abuja are sub-standard even by African standards.
While privatization is the only credible solution, the jury is out on when and how the state will sell off its dysfunctional assets. Says Atedo Peterside, chief executive officer of the Lagos-based Investment Banking and Trust Company (IBTC): “I have personally been waiting for privatization here to go ahead since the first draft on the subject, which was never actually signed, was drawn up in 1986.”
But optimists point out that while federal government sell-offs are the focus of attention, privatization is also starting to happen at state level. Funke Osibodu, a former Citibanker and now managing director at Merchant Banking Corporation Nigeria (MBC) says that her bank was the first to win a privatization mandate from a regional government. This involves the sale by the Ogun state government of 60% of its equity holding in Gateway Pharmaceuticals, 40% of which would go to a strategic investor with the remaining 20% floated on the local stock exchange.
A series of formidable hurdles will need to be cleared if the country is successfully to sell off its assets, including public resistance to job losses. Another problem is lack of money. The government’s preferred model would be to sell a 40% stake to a strategic industrial investor, retain a 40% stake and float the remaining 20% on the stock exchange. Ebenezer Olufowose, general manager of the Investment Banking Group at GTB, says that a “wild guess” would put the total requirement at between $30 billion and $40 billion. That would suggest that stakes in privatized companies worth between $6 billion and $8 billion would eventually need to find their way on to the stock market.
For that to happen, Nigeria would have to see a dramatic increase in local savings. Nigeria’s savings rate, according to the Lagos-based financial consultancy and ratings company Agusto & Co, remains a pitifully low 5.8% of GDP.
Peterside of IBTC points out that the recent N3.5 billion ($40 million) rights issue led by IBTC for the Nigerian Bottling Company (NBC), the local Coca-Cola bottler, was the largest the local market had ever seen. “People who talk about the potential for deals of $100 or $200 million have to be joking. At the end of the day the savings rate simply isn’t sufficient to accommodate deals of that size.”
But the prospect of attracting strategic investors may be brighter. Bankers in Lagos believe that Nigeria’s basic utilities are so hopelessly underdeveloped that the potential for engineering a turnaround is virtually endless.
