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Investing in Nigeria, potential opportunity for strong growth due to high oil revenues

Economics / Investing Nov 30, 2006 - 02:41 AM

The Nigerian economy is expected to grow by 7.5% during 2006. With prospects of growth exceeding 7.5% for 2007 and 2008, as Nigeria continues to enjoy dividends from the high oil price and inward investment into the oil and support industries. The Nigerian government also makes strides towards ensuring power generation to feed the growing economic activity.

The Nigerian foreign currency reserves now exceed $41 billion, with the oil revenues resulting in an budget surplus of over $10 billion. Enabling the government to invest in infrastructure projects such as $40 billions for the modernisation of Nigeria's railway track system. The inflation rate has also fallen from 12% in 2005 to 6.5% this year, (the lowest rate in over a decade), which brings greater stability to the currency .Nigeria is Africa's most populous country of some 132 million people with GDP per capita of $1,085.

Nigerian Politics
Nigeria's political history is littered with military coups, presently Nigeria has an elected leadership. But faces serious challenges of breaking apart along ethnic and religious lines. The country has been led by Olusegun Obasanjo since 1999, for a maximum of 2 terms, but in the run up to the 2007 elections the ruling party "The Peoples Democratic Party" is seeking to amend the Nigerian constitution to allow Olusegun Obasanjo to seek a third term in office, which is illegal under the current constitution. This is further destablising Nigeria politically, with politically motivated killings on the rise.

Risks
Unrest in many areas of Nigeria present a potential risk to the oil revenues, including the very poor Niger delta oil region. Attacks by militants claiming the region does not get a fair share of Nigeria's oil wealth have cut more than a quarter of Nigeria's oil production this year. Nigeria is the fifth-largest source of U.S. imported oil, and should the unrest continue, it is not inconceivable that US may intervene militarily during 2007.

The Nigerian government needs to continue to build both economic and social infrastructure. Where healthcare is concerned Nigeria ranks 187th in the world of 190 countries, and only spends 5% of GDP on health, this contributes to an aids epidemic and an overall life expectancy of 45 years. Much more needs to be invested in social projects to improve living conditions of nigerians as well as to more evenly distribute the oil profits to prevent further unrest.

Nigeria also needs to invest in Education, where adult literacy lags many developing countries at just 67%. Recent developments include the creation of 500,000 admission spaces for people seeking degree qualifications to provide the economy with professionals and skilled manpower.

The power sector needs major and significant investment to boost electricity output.

Growth Prospects
As long as a high oil price sustained and the unrest is contained then then the economic prospects for Nigeria is good, as companies and governments look to invest billions of dollars into developing Nigeria's resources. Nigeria also benefits from the continuing debt relief of $18 billions as a result of last years declaration by the Paris Club of creditor nations. Like india, Nigeria has a large pool of english speaking labour. Nigeria could potentially earn over $200 billions from oil revenues over the coming decade as oil output is expected to increase by 70% over the next 3 years, which if utilised will lead to an sustained economic boom on par with that experienced by other oil rich states, with target year on year growth of 10% per annum, far higher than the 2 to 3% target growth rates in the western developed economies.

How to invest in Nigeria
The best route into Nigeria is probably via managed funds such as unit trusts or investment trusts, run by recognised fund managers.

Direct investments into Nigerian companies are also possible with more information at the http://www.nigerianstockexchange.com/index.jsp which is home to about 260 Nigerian companies, and see Nigeria Business Info - http://www.nigeriabusinessinfo.com/index.htm

Alternatively investing in oil companies that have a large stake in the Nigerian oil industry such as Royal Dutch Shell is an option. Presently Shell trades on a low P/E of 10 . Other oil companies with major stakes in Nigeria include Chevron Texaco and Exxon Mobil.

Nadeem Walayat

http://www.marketoracle.co.uk

Disclaimer - This Analysis is provided for general information purposes only and not a solicitation or recommendation to enter into any market position, and you are reminded to seek independent professional advice before entering into any investments or trading positions.

Comments

glo
02 Jan 08, 13:07

capital market forecast in 2008(analysis of various stock.)

Hello,

This is is quite informative and impactful.pls i will apreciate if u can furnish me with relevant information on the nigeria capital market outlook for 2008 i.e investable stocks that should yeild return 4 medium term investment.this is to enable me make investment decision thruogh the nigeria capital market.

thanks

glo.

S.N.Ernest.
03 Feb 09, 04:39

Nigeria - its intresting

Its most intresting to know that our fatherland is do well in terms economical growth as this will encourage us to start thinking of investing at home.

proper location and constitutional backing is all the encouragement that is needed now. We wholehearted look forwad to that moment where the dresms of our heros will come to pass.

thinking of investing in the manufacturing industy can u kindly help me with the right channels,

its to our great home.

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