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    What is the investment status and timing in Nigeria, Africa

    April 2019

    Soon after President Muhammadu Buhari returned home from three months in the care of doctors in London, he made a five – minute speech on live television to reassure Nigerians he was still up to the job.

    It seems like a long time since March 2015, when Mr. Buhari, a stern former military ruler, marked a defining moment in Nigeria’s journey by becoming the first opposition candidate to unseat an incumbent party democratically since independence.

    After Nigeria’s first construction for 25 years, in which gross domestic product shrank 1.6% last year in country used to 6 or 7% annual growth, the economy is out of recession. Following five negative quarters, GDP expanded in the three month to June by 0.55% year on year. It is hardly the stuff of legend but enough to draw a wobbly line under two grim years.

    The oil sector returned to positive territory, expanding 1.6%, although that was less than most economists had been expecting.

    The question is what happens next. Can the economy build on that snap back to the sort of growth rates to which it was accustomed? If that seems unlikely, can it at least improve the quality of growth by becoming less dependent on oil for government revenue and foreign exchange? Or does the fragility of the recovery point to deeper structural problem? The answer to these questions depends partly on assessing whether the government of Muhammadu Buhari has done enough to change how the economy works. Lai Mohammed, information minister, insists that it has. The rebound is proof that government reforms are working, he says. Mr. Mohammed has also mentioned that the administration has squeezed out corruption and inefficiencies, increased government spending, established a “single treasury account”, rationalized the foreign exchange markets and rejuvenated the non-oil sector.

    He highlights attempts to diversity by supporting mining, agriculture, construction and more important the creative industries. The current government is spending much more than the previous administration on roads, housing, rail and electricity power. He also reflects on the progress in the oil-producing Niger Delta, where sabotage has fallen significantly after talks with militants, helping on output rebound to 1.8 million barrels a day from a trough of 1.3 million. Economy watchers welcome the development but fear fresh attacks if militants cannot be paid off. To us as possible investors what is important is the honesty and purpose of the new government – results may not come overnight – but there has been definitely build a foundation.

    Yet one source of confidence among investors is the return to some kind of normality on foreign exchange markets. Throughout the recession, business lacked access to dollars. This was the result of a central bank rationing regime, itself the consequence of an attempt to defend an unrealistic naira exchange rate – the last thing the economy need if it is to diversify its manufacturing and export base.

    The government has gone some way towards fixing these problems, introducing an “investor and exporter window” at which businesses can bid for dollars. Turnovers at that window has shot up drastically to more than 1billion US-Dollar a week, helping local manufacturers seeking foreign exchange as well as foreign investors looking to cash in. That has triggered an equity rally and, more recently, greater interest in local bond markets. Bankers mention improvements to the foreign exchange regime have given impetus to previously paralyzed investors.

    The government has also returned to international debt markets in an effort to lower borrowing costs, pushed up by high domestic interest rates. This spring the government raised 1.5billion US-Dollar in two separate, oversubscribed, 15-year issues. It is looking to raise at least 3billion US-Dollar more to replace maturing short-term local currency debt.

    Nigeria’s banking industry is dying, says the energetic chief executive of Diamond Bank, the country’s sixth-biggest lender by assets in comparison. It is a provocative statement but it is why Uzoma Dozie is reinventing his organization as a vital part of the country’s small but fast-growing digital economy. “We’re in the fulfillment business,” Mr. Dozie says, at the bank’s Lagos headquarters using a phrase coined by Amazon executives. “Our philosophy is going beyond banking and connecting people and connecting markets.” Bold claims about the potential for banking in Nigeria – where 40% of people still do not have bank accounts – are an industry staple. Even in 2008, when it looked as though the country’s financial system might collapse, bank chiefs talked up their loan books in the most glowing of terms.

    Although the sector is now on a firmer footing, Mr. Dozie’s instinct is correct in at least one respect in our opinion: as Nigeria emerges from it first recession in 25 years, lenders need to start thinking differently.

    While larger banks have posted seemingly healthy results despite the downturn, these do not necessarily reflect prudent lending to profitable companies. Rather, the devaluation of the naira in June 2016 allowed banks to book huge gains in the value of foreign exchange – denominated assets. Lenders are also making easy money by rolling over low-risk government securities, small businesses, meanwhile, are lucky to borrow at less than 22% of annual interest.

    Although few expect a repeat of the convulsions that struck almost a decade ago, concern over asset quality deepened during last year’s recession and currency crisis. The highest – profile casualty of the recession was the Nigerian arm of Etisalat, the mobile operator from the United Arab Emirates, which owed 13 local banks 1.2billion US-Dollar.

    “We have come from such a weak economy that you cannot argue today that the banks’ non-performing loan ratios should be in the 5% band that most of them are reporting”, says Jumai Mohammed, an equity analyst in Lagos at boutique investment bank Exotix. “It just doesn’t make any logical sense.”

    In scouting beyond the sector’s traditional clientele in oil and gas, infrastructure and big corporate, Mr. Dozie is betting on Nigeria’s vibrant eco-system of online payment companies, ecommerce start-ups and mobile banking.

    “The positive side of the recession is that I think banks are beginning to wake up to the fact that we can’t rely on oil business anymore,” Mr. Dozie says. “We have to develop the other opportunities that exist in the Nigerian market.” He is – as we are – so immersed in the start-up scene that every Friday he hosts “Tech Turks”, Diamond Bank’s online chat show for founders, which we find a brilliant idea.

    While Nigeria has lagged behind Kenya in the rush to mobile banking, Diamond Bank has driven the expansion of phone – based financial services through a partnership with South Africa’s MTN, which holds the largest share of the Nigerian mobile market. To put that growth in perspective, Diamond says it look 24years for the bank to acquire its first 6million customers, through network of more than 250 branches. In the past three years, it has acquired 6million more retail customers using mobile phones. Diamond Bank believes that data-sharing deals with online payment and ecommerce companies will allow it to gain a clearer picture of the credit worthiness of its customers. Such data could in turn prove valuable for businesses seeking to target products at customers more efficiently.

    Nigeria’s tech sector by no doubt is growing fast but investors like us may question how well Mr. Dozie will do, given the difficulties in the sector.

    The recession also did not punish all banks equally. Big lenders such as Zenith Bank, United Bank of Africa and Guaranty Trust Bank have valued since the central bank opened a foreign exchange window in April, easing a crippling foreign currency shortage, while smaller banks have absorbed a disproportionate share of the pain.

    Any business thinking of investing in Nigeria faces a daunting prospect. Public bureaucracies are labyrin – thine, slow-moving and notoriously corrupt. Basic services such as electricity and water are unreliable, if available.

    Skilled and semi-skilled workers are often hard to find. Just getting about is a hazard, with gridlocked traffic in cities and crazy driving on potholed highways contributing to one of the world’s highest rates of road deaths. Added to all that is an economy bumping along the bottom after a deep recession, and an alarmingly high rate of unemployment that has driven many young people into the arms of criminal gangs and violent insurgents.

    All this is true, and more. Yet once such investors arrive they also find a parallel reality: a country buzzing with creative energy, many of its people convinced that things will soon improve. Nigeria is not all a poor country, it is a wealthy country that has not managed its opportunities and resources very well. Nigeria also has no shortage of remarkable entrepreneurs or of people with the right work ethic to go out and put food on the table. Such dynamism is immediately palpable in Lagos, not only in its vibrant comedy scene, for example, but also in the world – renowned music and fashion, its increasingly sophisticated cinemas and in its literature. It is also evident in the city’s fast-growing digital economy, where hundreds of new companies are springing up with the potential to create thousands of jobs. What I have realized for the first time when you are in Abuja or Lagos or Ibadan or Port Harcourt you have connectivity that would rival central London. Nigeria has reached for the first time a point, where you can begin to have people pay for things online.

    Nigeria’s agriculture sector, too, is bursting with dynamic individuals like Rotimi Williams, former investment banker who is taking rice farming from the north to Ogun state, just inland from Lagos, in one of many enterprises bringing producers nearer to the country’s biggest market.

    Not all sectors are as effervescent. The banking industry as described before has been hammered by the recession that followed the collapse in the oil price from mid – 2014, thanks to its heavy exposure to deeply indebted oil companies.

    Nigeria has long suffered from the oil curse – on over-reliance on its considerable reserves as a source of foreign earnings. This has made it complacent about developing other export sectors while failing to put its resources, particularly gas, to good use as an energy source at home.

    Nigeria’s other longstanding problem is the fragility of its infrastructure. A small number of investment funds are rising to the challenge of attracting capital to what is a frustratingly slow-moving sector.

    Venture capitalists are noticing a wave of internet entrepreneurship, including cashless payment companies, social networks and retail. Bullish financiers see the sector as a way to tap growth in a market of 186 million people without becoming mired in the politics of big energy or infrastructure projects, or falling hostage to oil prices. What I personally think is truly magical about technology in Nigeria is that it has shown growth that is completely uncorrelated to the GDP cycle. Africa-focused investors and entrepreneurs should consider that the average investment secured by Nigerian start-ups rose from 57,000 US-Dollar in 2015 to 73,000 US-Dollar this year – with just over 40% able to secure external capital.

    Several factors have jolted the industry into gear. Reliable internet is more widely available and telecom companies have boosted data capacity, while new payments companies have made online transaction safe.

    The fizzing start-up scene is already attracting the attention of tech companies in the west. When Facebook founder Mark Zuckerberg made his first trip to sub-Saharan Africa in 2016, he visited both the Co-Creator Hub and Andela, a company co-founded by US entrepreneur Jeremy Johnson. The Chan Zuckerberg Initiative chose Andela for its first private sector investment.

    The potential is clearest in financial services. Flutter wave, a company building a pan-Africa online payments infrastructure, processed 200million US-Dollar of transaction in the second half of last year. Between January and July this year, it handled already 1.3billion US-Dollar.

    Pay stack, which helps businesses accept transactions online, has also grown rapidly. It was the first Nigerian company to enter the Y combinatory accelerator in California, where it raised the bulk of a 1.3million US-Dollar investment.

    Although more investors are betting on Nigerian tech, there is still a lack of capital in the 100,000 US-Dollar to 1million US-Dollar range. Borrowing is also a problem, given the high interest rates changed by Nigerian banks.

    At the end I would like to point out, that Nigeria is leading the world in network sharing, where investors buy the masts from operators so that they concave costs and focus on providing the service. Foreign investment in these towers is a pan – African trend which we are considering at the moment. Investment in Nigerian telecoms has been a bumpy ride for many foreign investors but the patient ones could reap the benefits of the market’s long – awaited maturity.