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Nigeria in 2014: Politics trumps economics

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Talk, about innovations riding on ubiquitous mobile phones, is rife. Just add the prefix m, for mobile (or e, for electronic, for internet-ready phones) to health, agriculture, money, governance etc.

Despite the imminent promises of mobile phones, looking at the past may be the best way to make sense of what lies ahead for Nigeria. Africa’s second largest economy is yet to experience the profound and predictable transition that fertilizer (and electric power systems) provided the Industrial Revolution. Fertilizer, a critical agriculture input, doesn’t get the attention it deserves. Possibly because it’s old fashioned or too mundane given its association with dirt and compost.

Around 1908, Carl Bosch and Alwin Mittasch, two chemists, together with Fritz Haber developed the Haber-Bosch process for ammonia synthesis. Industrial-scale production of ammonia began in 1913 in a factory owned by BASF, the German chemicals company.  Last September was the centenary of the invention of ammonia synthesis.

Ammonia, made from synthesis gas, is a primary petrochemical product, and is used to make fertilizer urea – 75 percent of ammonia generated globally is still used for the production of fertilizers.

Fertilizer made from ammonia boosted agricultural productivity, ridiculing Malthus and his co-doomsayers. The Haber-Bosch process has increased the estimated that the number humans a hectare of arable land supports to 4.3 persons in 2008 to 1.9 persons in 1908.

This century-old and unexciting invention has attracted Aliko Dangote, cement czar and Africa’s richest man. Dangote has committed $3.5 billion, as equity, in a $9 billion investment to build the largest refinery/petrochemicals/fertilizer complex in Africa.

In Nigeria, fertilizer consumes 70 percent of the production cost for growing cassava using the estate production method. To wean itself off imported rice, intensive cultivation of rice in the country will demand high rates of nitrogen fertilizer. Cassava, rice, sugar, cotton, maize soyabeans are classified as Africa’s competitive commercial crops. Nigeria supplies the world with cassava. In 2014, the agriculture sector is expected to record much higher growth due to increased backward integration by companies coupled with finance and guarantee schemes from the Central Bank of Nigeria (CBN) and the Ministry of Agriculture.

Stable macroeconomic growth, thanks to a thriving non-oil sector, urbanisation, and a growing middle class with numerous unmet needs is driving demand for commonplace commodities: rice, sugar, cement, polythene sacks.

Analysts at Afrinvest, an investment bank, project that GDP will grow above 7 percent with wholesale and retail trade experiencing the largest growth. Though agriculture is likely to lose its perceived dominance, after the GDP is rebased, agro-allied services are a promising sector to watch.

Commodities such as rice, and cash, will be distributed in “Ghana must go” poly bags as political parties rally support. In 2014, politics will be prime time; policies will be hived to the rear.

Diehard, optimistic and football-mad Nigerians will cheer the Super Eagles, the national football team, during the World Cup in Brazil. Nobody party’s like Nigerians; its “extremely extravagant elite” are quaffing cognac and swilling champagne. Consumption of the bubbly, sparkling wine is expected to reach 1.1 million litres by 2017 – 8 billion naira was spent on champagne in 2011. This year, consumption of cognac will break the 1 million litre mark (higher than Mexico, Canada and South Africa), according to Euromonitor.

Nigeria’s liquormania, call it conspicuous consumption, reminiscent of the sqaundermania of past oil booms, has drawn the likes of Diageo, Picard, Moet & Chandon and Shoprite, the South African retail chain, to the country. In 2012, Shoprite sold more champagne in its eight Nigerian stores than all of its stores in South Africa.

Celebrations are in order, though, in Nigeria’s electricity supply industry. Nigerian banks put up $1.6 billion of the $2.5 billion for purchasing state-owned power assets; proof that the banking sector has matured, somewhat.

One London-based investment professional expects the power sector to take off as IPPs join the grid and privatized Gencos and Discos take charge. However significant power supply improvement that will impact GDP is not expected until 2015.

Next April, Lagos State, at its 7th Lagos economic summit (Ehingbeti 2014), titled “Powering Lagos: Real Opportunities, Endless Possibilities”, will set out its stall as Nigeria’s premier investment destination.

That said, Nigeria will have to face and react to policy clocks in 2014: the rapid tick of depletion due to the humongous scale of oil theft; the erratic tick of oil prices and the long trek to building capacity to properly invest proceeds from its $1 billion Eurobond and planned Diaspora bond. The central bank has said it is braced to tighten monetary policy as fiscal policy deteriorates in 2014 due to election spending and crude oil output disruptions.

Analysts at Afrinvest, an investment bank, expect “the CBN to tighten monetary policy further by Q1:2014 in view of the US QE tapering, expected interest rate hike in Europe and 2015 election spending. This might necessitate increase in the MPR to about 13% coupled with possible adjustment of the asymmetric window to +2% and -4%.”

Furthermore, Afrinvest analysts reckon the CBN may increase the cash reserve ratio (CRR) in its bid to cleanse the system of additional public sector funds “to c. 75 percent [and] might get to 100 percent if the system becomes awash with excess political cash.”

Nigeria’s rebased GDP, expected sometime next year, should see Nigeria move closer to South Africa as the premier destination for investors. However, capital flow reversals, due to an increase in interest rates in the EU and as the Fed stops buying assets, will see “yields on FGN bonds experience an upward pressure… to average 15 percent by H1:2014.”

According to Afrinvest, “robust ancillary financial services” e.g. mobile money, merchant banking, non-interest banking, agency banking will emerge “as a result of the various CBN policies to eliminate cost of banking. These will drive the financial inclusion of the CBN further.” Assuming politicians’ provincial and primitive politics don’t disrupt the economy’s momentum.

Going into 2014, Nigeria will remain flavour of the moment for foreign investors. Until news about political and oil production disruptions become unbearable for portfolio investors.

Expeditions to London to promote Nigeria as an investment destination will reduce. At conferences for investors seeking outsize returns, in a world of few opportunities, merely reeling out the demographics, economic growth and business opportunities has excited investors. Until you mention Nigeria. For most investors, the word Nigeria is a wet blanket. Even so, daring investors who ignored their home country’s scary travel advisories have discovered opportunities. Next year, they will be wishing for an uneventful pre-election season.

Previous elections have been marred by electoral chicanery funded through fiscal splurge (the preferred tactic of the incumbent) and sullied by violence. Weaker opposition parties have been prone to incite and use violence. Violence may be curtailed this time around. APC, a larger party with a broader regional appeal will be the biggest contestant the PDP, the ruling party, has ever faced since the return of democracy in 1999.

(The original article, Politics brakes economic momentum, appears in special Nigeria section of The World in 2014, published by The Economist)

By: Tayo Fagbule