Of all sub-Saharan Africa, the developing markets of Western Africa seem to be the most investable. As a whole, they have abundant natural resources and a will to develop stronger ties with Europe, Asia and the U.S. than the countries of East Africa.
Of these, Nigeria—which now boasts Africa’s largest GDP—has the potential to break away from the rest of the African continent economically. However, there are challenges facing this most populous of the African nations—168 million citizens vs. South Africa’s 51 million—which are not minute by any stretch of the imagination, and mainly have to do with the political stability of the country.
It seems that recently the only news headlines about Nigeria are about another bombing or abduction of young girls by the terrorist group Boko Haram. The inability of the current government to get a handle on the terrorist situation does not bode well for future development, as it could cause the increased flow of foreign capital—resulting from the recent upped allocation (11.66%) to Nigeria by the MSCI Frontier Market Index—to dry up.
Despite its terrorism issues, Nigeria has averaged 7% growth over the last 10 years, which is about 4% higher than South Africa's.
Nigeria’s economy hinges on crude-oil exports: some 70% of trade volume and 80% of the country's budget is tied to oil. Nigeria is the continent's largest oil producer Recently, Nigerian oil has been flowing into Asia in increasing amounts, with India now being its largest customer, surpassing the U.S., which once took the bulk of Nigerian oil production. India now purchases some 30% of Nigeria's daily crude production, which currently hovers around 2.5 million barrels. After India, China and Malaysia are the next largest importers of Nigerian oil. As the pace of development in the Asian countries picks up over the next few years, Nigeria can be assured of a vibrant market for its oil.
That said, one of the areas Nigeria needs to address immediately is the constant theft of oil. It is estimated that Nigeria loses approximately $35 million daily, about 25% of its total output. A recent report issued by the Energy Committee of Nigeria's National Conference called on Abuja, the capital city of Nigeria, to "bring this racket to a full, final stop."
The other main challenges Nigeria faces is building refinery capacity, diversifying trade volume beyond oil and building infrastructure. Ironically, the reason Nigeria imports 70% of its fuel needs is because it lacks the refinery capacity to supply the domestic market from its own production.
The situation is being addressed by Nigerian native Aliko Dangote, Africa's richest man (24th on Forbes 2014 list of the World's Billionaires). In September, Dangote’s company, Dangote Group, announced a $3.3 billion financing deal to build the continent's largest oil refinery, and petrochemical and fertilizer plant on Nigeria's Atlantic coast. The project is estimated to cost $9 billion and is expected to be completed in 2016. It will initially have a capacity of 400,000 barrels/day, which will save the country as much as $24 billion annually in foreign exchange and halve its fuel imports.
To diversify trade volumes, the country is encouraging agricultural investments and, in 2011, launched a program to encourage more private enterprise.
With an ailing power grid and little infrastructure, the government has reached out to the World Bank, which estimates that at least $10 billion needs to be invested in infrastructure just to meet the current needs of the population. As a side note, Dangote will build its own roads, pipelines and infrastructure needed for its refinery.
In addition to dollars flowing into the country from its domestic billionaires and the World Bank, foreign direct investment in Nigeria has increased rapidly and now accounts for 29.57% of all investment in Africa.
While there aren’t many avenues for individual investors to access investment opportunities in Nigeria, it is possible to gain exposure to Nigeria. Until recently, investors would have needed a Nigerian brokerage account to access the country’s stocks, but Imara S.P. Reid has launched an investment platform for retail investors to make investments in any stock market in Africa without having to use multiple brokers. The Nigerian Stock Exchange All Share Index (NGSEINDX) seems to me more accessible.
Typically I caution against investing in indigenous companies because of transparency and liquidity as two large issues. That said, the Dangote Group (Nigerian Stock Exchange: DANGCEM), worth more than $11 billion (and comprising fully a third of Nigeria's stock exchange) is certainly a company worth watching.
When it comes to funds, the only fund with Nigeria as its sole focus is the Global X Nigeria Index ETF (NGE), which tracks The Solactive Nigeria Index. This index is designed to reflect the broad-based equity performance in Nigeria. The only other ETF options for Nigeria exposure are the Market Vectors Africa ETF (AFK), which allocates nearly a quarter of its weight to Nigeria, and the iShares MSCI Frontier 100 Index Fund (FM), which has nearly 13.8% of its weight in Nigeria.
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