With a population of 180 million people, Nigeria represents one quarter of the total African GDP. This note highlights the reasons why we stay away from one of the most important and promising countries in Africa.
The naira lost about one-third of its value against the dollar when the central bank removed a currency peg the last June. Since then, the central bankers have kept the naira at around 315 per dollar. In the meantime, the black-market rate has plummeted to 383 as the dollar squeeze worsens. Nigeria is in the same situation than Egypt before the country decided to float the pound in November. If the naira were free floating, like in Egypt, it would overshoot, maybe to 450 per dollar or even 500. The risk of a significant devaluation is well alive, and we believe the country will not have other option than to follow the Egyptian example.
A difficult Macroeconomic situation
The West African nation will probably seek $3.5 billion abroad for its 2017 budget to plug a deficit of 7.3 trillion naira ($23 billion). The government returned to international capital markets in March for an additional $500 million after raising $1 billion of Eurobonds in February. Its debt-service costs doubled to 66% of revenue last year from 2015.
The inflation is running at 17.8% and the central bank has kept its key rate at a record high of 14% since July. In the meantime, inflation is at almost double the government’s 9% targets.
The official unemployment rate jumped to the highest level in at least seven years to 13.9%.
Rising of non-performing-loans
At least 55% of the mortgage industry’s 94 billion naira ($300 million) of loans are classified as non-performing. The level stands at 10% for the 18.5 trillion naira of loans granted by the country’s banks and 45% for micro-lenders, which have 195 billion naira of outstanding loans.
In the North of the country, Islamist militant group Boko Haram has caused $9 billion of damage in the country since 2009, destroying homes, schools, bridges and roads, according to the United Nations. Nigeria is almost evenly split between a mainly Muslim north and a predominantly Christian south.
The restoration of stability in the Niger River delta, – where militants blew up pipelines, cutting crude production to almost three-decade low in 2016 -, is still a concern.
Change needed urgently
Under unchanged policies, the outlook remains challenging. Stronger macroeconomic policies are urgently needed to rebuild confidence and foster an economic recovery. Nigeria’s debt-servicing cost is too high due to low revenue. The government need to increase revenue by raising value-added tax, expanding the tax base and improving compliance.
Last month, Nigeria announced a four-year program to create 15 million jobs and stimulate an economy that shrunk by 1.5% in 2016 , the first contraction since 1991. The aim is to boost economic growth to 7% by 2020 by lifting oil output, opening farmland and increasing investment in power, roads, rail and ports. According to the IMF, GDP would increase by 0.8% in 2017 and 1.9% in 2018. Still, the growth is too weak to boost the country significantly.
S&P Global Ratings spared the West African nation a downgrade in March, affirming its B rating with a stable outlook, and said increasing crude output and government spending will support growth.
We believe it is too early to comeback to Nigeria. The country is engaged in challenging reforms and likely a devaluation is coming.