Impact of low oil prices in Nigeria

This article is a section from a report “Investing in Nigeria” and shall be viewed in the context of the title. Please view the report for more information on the subject as well as references for this article.

Diversifying the economy has always been on the Nigerian governments agenda. With the falling of oil prices and decreased inflow of oil revenues, the need to do so is arriving with a great urgency.

The fall of oil prices has only had an impact on the government revenues. Oil and gas sector was never a major job creator for the economy and the capital generated didn’t stay in the country. The revenues the government generated were not invested in infrastructure but rather consumed. This has had an impact on the industries that are dependent on domestic demand, such as retail and telecoms, but there are no other major challenges to the economy due to the falling oil prices.

Uncertainties with the Naira and oil prices have not changed the investment appetite for Nigeria, it’s changed the activity in investments and approaches to investments. Some investors are taking a “wait and see” stance, while others are exploring other aspects of the economy. There has always been interest in mining and agriculture, but there were plenty of opportunities in oil, so no real considerations were made. Low oil prices have made investors consider these sectors more seriously.

Long term prospects of unconventional sources of oil suggest that prices will likely remain low. Many people view this positive for the country in the long term, there has been a sense of oil being a curse for the country. With the discovery of oil in 1960’s, many of the strong sectors of the economy vanished. Nigeria was once supplying 27% of worlds sun flower oil demand, it was the leading country in sun flower oil exports.

Every poor country in the world that has discovered oil saw an incredible rise in corruption. Every dollar invested in infrastructure has proven to return itself multiple times, yet African countries haven’t been doing that since they were able to simply live off of the oil revenues.

Some African nations are oil importers, such as Ethiopia. With high oil prices, billions of dollars were flowing out of the country. Now this money is staying in the county and is being spend on the country. This puts even more urgency for Nigeria to develop alternative revenues and invest them in the country, to keep up with other African nations in development. The country might, otherwise, see future FDI flow to these oil importing countries that now have the chance to grow their sectors and industries with the money they’re saving on oil.

Low oil prices are of short term benefit to the manufacturing industry – most electricity generators in Nigeria run on diesel. Getting used to cheap diesel to run factories on, is a threat in case the oil prices go back up however, adding risks to investments in the manufacturing sector.

For the natural resources investors, there are over 40 different minerals that can be found in Nigeria, with a number of them potentially commercially viable for extraction.

The future of Nigeria is not in oil, it’s in services, infrastructure and industrialization.

Devaluation

Devaluation remains one of the biggest investor concerns. Naira has seen a lot of fluctuations in 2014 and early 2015. In November 2014 Naira was officially devaluated from 150-160 Naira per USD, to 160-176 Naira per USD.

Naira kept falling versus the dollar throughout 2014. The Central Bank of Nigeria had to spend some of its reserves in early 2015 to protect Naira from a continued fall.

It has now been stable for the last 6 months at around 199 Naira per $1.

Nigeria has one of the strongest currencies of the oil exporting nations.

Buhari has made public statements on international news channels, stating that he doesn’t think it’s healthy for Nigerians if Naira is devaluated and that he won’t let Naira go.

There have been foreign currency trade restrictions in the exchanges, this has been felt by many businesses that use foreign currency to conduct business. For example, some firms are unable to source the dollars they need to pay foreigner suppliers. The logistics industry, combined with other issues the country is facing, such as Boko Haram, is seeing Naira devaluation reflected in their bottom lines, as they need to operate in multiple currencies.

A lot of economists are continuously arguing that Naira should be devaluated as this will increase domestic production. This would also go in hand with other policies the government is implementing, such as high tariffs and import bans, as well as the general perception of the domestic manufacturing and consumption potential. There has, however, historically been a bias towards strong African currencies by the central banks, to keep the currencies up, not to face inflation and civil unrests.

Some have argued that there is no need for devaluation, but rather a stabilization of Naira against major currencies.

Any risk analysis done by investors shall account where Naira will fall out.

Domestic companies are advised to borrow in local currencies.

Conclusions

The short term economic difficulties, such as falling Naira and outflows of foreigner capital, are providing discounted deals in underdeveloped industries and sectors of the economy. Some of these industries are far away from any infrastructure peaks, providing great growth and return potentials for investors. The young, upwardly mobile consumer base is proving the big returns Nigerian industries are seeing to be sustainable for long term returns and growth.

The low oil prices have made a shift from oil based economy to a diversified economy. This has shifted focus to underdeveloped industries within the Nigerian economy full of opportunities. Some industries that are just now starting in Nigeria, such as mobile advertising, real estate and technology are bond by the macro threats the economy is facing to a limited extend, decreasing the associated risks with Nigeria while returning the expected frontier market returns.

 

Bertrams Lukstins on EmailBertrams Lukstins on GoogleBertrams Lukstins on LinkedinBertrams Lukstins on Twitter
Bertrams Lukstins
Bertrams Lukstins is an market insights consultant with expertise on the emerging African markets.

Services provided:

* Market entry
* Research
* Business development
* African business financing

Published by

Bertrams Lukstins

Bertrams Lukstins is an market insights consultant with expertise on the emerging African markets. Services provided: * Market entry * Research * Business development * African business financing

Leave a Reply

Your email address will not be published. Required fields are marked *