At the end of last year we were advocating that progress in any one of these areas would justify a more positive approach to the market, while progress on all three would be extremely positive. To our surprise, the latter is happening.
Fuel price rises
The reduction of the fuel subsidy has been widely covered in international media. This was costing perhaps $7bnto $8bn, more than the combined budgets for education, health and agriculture. The compromise, which has seen the retail price of a litre of petrol rise from NGN65 (40 cents/25 pence) to NGN97 (60 cents/40 pence) instead of the targeted NGN140-145 (90 cents/58 pence), will be politically acceptable, we hope, while cutting the scope for corruption and allowing a redirection of funds that should benefit all Nigerians and reduce long-term fiscal risk.
We may see further rises in fuel prices in 2013.
The government has just abolished the electricity Power Holding Company of Nigeria, which had been a major factor preventing reform of the electricity generation sector, in our view. Nigeria remains woefully underpowered in contrast to other sub-Saharan countries, as any back-to-back visit to Ghana and Nigeria will demonstrate.
The lack of officially generated power means that Nigerian businesses rely on expensive electricity from imported small generators, reducing the efficiency of all sectors of the economy. Note also the possibility of an electricity price hike, with widespread media reports suggesting a rise of between 50% and 100%. We believe any push back on this move by Nigerians is likely to be significantly moderated by the prolonged pain of higher costs associated with generating power from inefficient alternative sources, such as generators.
The third area of reform progress is the Petroleum Investment Bill (PIB). Over the past few decades, investment throughout the Nigerian oil sector has been governed by a mish-mash of legislation. The PIB aims to unify all the necessary legislation in one bill, providing a clear framework for investment in the energy sector.
Agriculture boost
The government promised to put the PIB to parliament by the end of Q1, and a bi-partisan special PIB task force was established on 19 January to help drive this process. The task force has been given 30 days from the date of its inauguration to produce a new, harmonised copy of the bill for consideration by the legislature. To some extent, progress is being made in some areas even without the PIB, but its approval would nonetheless improve the energy investment climate.
What more could be done? We have high hopes that Agriculture Minister Dr Akinwunmi Ayo Adesina might slash the $4bn food import bill by encouraging private-sector investment in agriculture and, for example, by boosting fertiliser use from 13 kg/hectare towards Chinese levels of 400 kg/hectare, as well as promoting the use of improved seed varieties. A constitutional review might cut down government bureaucracy, which at present is heightened by overlapping ministerial jurisdictions, a minister for each of the 36 states and 774 local governments.
Against this backdrop, we expect bank lending in Nigeria to begin to pick up in 2012. In 2010-2011 a decline in the private-sector debt/GDP ratio undermined the equity market. We do not expect a bank lending boom this year, so the market will not be pushed higher by local liquidity, in our view. However, a shift of foreign money into Nigeria on the back of the reforms outlined above could offer support to the stock market.
Heading into 2013 and beyond, local liquidity could then kick in and drive the market higher still. The implication is that while until now investors had only Nigeria’s at only 7% to 8% growth, its great demographics and potential to buy into, we now also see evident reform and an increasing chance of growth rates of up to 11% over the long term.
Given that potential MSCI weighting changes could boost Nigeria’s stock market in mid-2012, we have to rate Nigeria in the first half of 2012 as a long-term buy.
