Nigerian Election: The Catalyst for a Continental Catch-Up
As countries across the continent look to mitigate the impact of the oil crash, Nigeria’s recent election could catalyse the country’s efforts to play catch up with its more diversified neighbours
By Abel Myburgh, Head of Africa’s Desk, BDO
Recent reports from the World Bank showed that Sub-Saharan Africa’s growth will slow from 4.5 percent in 2014 to four per cent this year, driven in part by the fall in oil prices.
The end of the commodities super cycle means that the less diversified oil exporters such as Angola and Equatorial Guinea are likely to be hit hardest while several oil importing countries such as Cote d’Ivoire and Kenya are expected to remain strong.
Nigeria’s historic elections last month saw voters choose, by a wide margin, former general, Muhammadu Buhari as their new President-Elect. The most competitive presidential race ever in Nigeria, it resulted in outgoing ruler, Goodluck Jonathan conceding defeat; the first time this has happened since Nigeria’s independence in 1960.
The response from financial markets showed the landmark nature of Buhari’s return to office for a second term: the Nigerian Stock Exchange witnessed its biggest leap in one day for more than five years and even the Naira recovered slightly in thin trade.
However, the full impact of the election on the business environment will be better understood next month when the incoming President lays out his economic agenda; a key pillar of his tripartite campaign promise, alongside reducing corruption and improving security.
So what is likely to be announced, what are the opportunities for domestic and international businesses and what are the implications for the wider oil and gas sector across Africa?
Nigeria is already identified as part of the promising “MINT” cluster of emerging economies also comprising Mexico, Indonesia and Turkey. Following in the footsteps of the BRIC markets, it is tipped for rapid development, and it’s perhaps no surprise why.
Nigeria is the seventh most populous country in the world and accounts for nearly one fourth of Sub-Saharan Africa’s population. It is recognised as the continent’s economic powerhouse, having established itself in poll position last year. Exceptional growth has been enjoyed predominantly thanks to its rich natural resources, making it Africa’s largest oil producer and now ranking 13th on a global stage.
However, as oil prices have crashed, its overly oil-dependent economy has been caught short. Its growth forecast for 2015 has been revised from 6.4 percent to 5.5 percent. Having forsaken other economic sectors - particularly agriculture - Nigeria depends on oil for 70 percent of government revenue and 95 percent of foreign exchange earnings. The low oil prices are driving low foreign exchange reserves, likely to result in further turmoil across the oil & gas industry.
One of the first legacies to be tackled by Buhari therefore will no doubt be a need to diversify the Nigerian economy. As a result, the oil & gas industry - Nigeria’s prime industry over the past decade - now braces itself in anticipation of the changes to be brought about by the new leader.
However, to gauge the likely impact on the sector, we need to take a broader view. Nigeria’s oil industry was already facing challenging times, well before the global price crash. Persistent violence in the oil-producing Niger Delta resulted in many operators divesting their onshore producing assets – few of these are now producing optimally. At the same time it had seen a chronic lack of investment amid uncertainty of the Petroleum Industry Bill.
Through the Bill, previous governments aimed to ensure that the oil & gas industry is refocused on professionalism, accountability, openness and transparency, in a bid to increase indigenous participation and multiply the nation’s wealth.
Reform revolved around the need to reorganise the sector by separating and clarifying the roles of different public agencies operating in the industry, as well as a need to infuse strict commercial orientation. But first introduced in 2000, the Bill is still awaiting passage into law and during this time Nigeria has faced increasing competition from neighbouring countries, which have made recent discoveries and opened up exploration and international oil politics.
It is expected that the new leadership will accelerate the reforms, particularly the consolidation of privatisation across the power sector, in order to attract more private investments.
In turn this should open up opportunities for those operating within the upstream and downstream segments of the sector. For the upstream petroleum sector, there will be new opportunities brought about by reform allowing for indigenous partners and multinationals to participate in government leases and contracts.
Similarly a new funding mechanism is likely to lead to an inflow of investment capital, opening up joint venture arrangements. Within downstream, new measures around the refining and marketing of petroleum products, transport logistics and facilities management are likely to present opportunities for ambitious businesses.
These elements of reform plus other policies are likely to be consolidated upon by the incoming government and should create further investment opportunities.
At the same time, it is expected that the capital market will finance entire infrastructural gaps as the government deploys fiscal incentives to deepen the market by encouraging companies in the sector; alongside those in the telecoms and aviation, to become listed on the securities market.
Unlocking the potential
However, the country is still currently awash with corruption claims and the threat of Boko Haram is very real. In an increasingly turbulent environment fraught with challenges, ambitious businesses need advisers who are natural resources experts and able to help them anticipate the services they need now and in the future to successfully navigate these challenges.
Similarly, the high degree of autonomy between Nigeria’s 36 states and Abuja, Federal Capital Territory means businesses face an array of different local practices and regulations depending on the city and state where they establish themselves. Deep local knowledge of these intricacies is therefore key to unlocking the potential.
As one of the largest audit, advisory and accounting firms in Nigeria, BDO supports domestic and international clients in navigating the market and grasping the opportunities there. We see Nigeria as an interesting future market for our clients and can support them with deep local knowledge, combined with global expertise and the consistent delivery of exceptional client service.