financial

Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

Nigeria Country Risks 2010

Weak Economic Growth Policy lines just behind Lack of Transparency/Corruption as weightiest risk Financial market risks converge at the top of weighted risks table than politics Possibility of further loan losses is top of 10 Risks to the Banking Sector of the Nigerian Economy in 2010 Nigerian banking sector will be stable in 2010 and Nigeria will meet its OPEC quota in 2010 are strongest positive sentiments on Nigeria
Table 1: Ranking of Risks by Weight

To support Nigeria outlook for 2010 with data on perception of risks in the country, Financial Nigeria conducted a survey in December 2009. The survey questionnaire had 25 mid-tier and top-level Nigerian executives across the various sectors of the economy as respondents. In addition, we conducted over 40 formal and informal interviews with top executives on their perception of risks and sentiments that will shape the Nigerian market in 2010. Findings from the survey are presented below, while the formal and informal interviews provide the commentaries on the factors we measured. One of the formal interviews is also featured in our Nigeria Country Risks 2010 report section. Asking how the array of risks we compiled in the questionnaire applied to key issues and sectors of the economy, the survey gauged the frequency respondents mentioned any of the risks. We also assigned weight to responses to the risks, in other to know the seriousness with which the respondents feel the risks will apply to Nigeria in 2010. Our analysis is presented in four areas. One is the ranking of risks by the aggregate weight to the surveyed risks. Two is the weighted ranking of risks to nine issues in the Nigerian economy in 2010. Three is the perception of 10 sentiments on key definitive factors that will characterize the Nigerian market and operating milieu in 2010. Finally, we also present the weighted average mention of Nigerian banks that are perceived to be most healthy. Ranking of Risks by Weight Lack of Transparency/Corruption ranks highest with (177) points as the severest of the risks that will define economic performance in Nigeria in 2010. The next weightiest risk is Weak Economic Growth Policy (166), although it was the most frequently mentioned.
FINANCIAL NIGERIA l JANUARY 2010

Risks Lack of Transparency/Corruption Weak Economic Growth Policy Currency Exchange Rate Volatility Budget Implementation/Policy Failure Investors Apathy Failure to Attract or Retain Top Talent Regulatory/Legislative Changes Higher Input Cost Poor Corporate Governance Cash Flow/Liquidity/Credit Crunch Loan Losses Government Policy on Energy Cost Inadequate Compliance/Enforcement of Rules External Shock from Lower Oil Price Fraud & Money Laundering Vandalism /Sabotage Weak Balance Sheets Civil Disturbances /Labour Unrest Armed Robbery/Kidnapping/Accident Distribution or Supply Chain Failure Change of President Poor Quality Public Work/Fake Products Imported Inflation Competition with Other African Frontier Markets Poor Employee Job Performance Damage to Reputation Weak International Engagement Inappropriate Tariff Inadequate Disclosure Epidemic/ Environmental Pollution Job Insecurity Electoral/Campaign Violence Employee Dishonesty/Financial Theft Weather/Natural Disaster / Climate Change Domestic Debt Financing

Frequency 54 63 46 47 36 35 30 32 29 33 24 24 30 27 18 23 22 24 18 23 16 19 20 19 20 17 19 16 13 12 12 12 11 14 7

Weight 177 166 147 115 88 84 81 77 76 75 71 69 67 66 62 61 59 50 47 45 44 44 43 39 38 37 36 36 35 34 29 27 25 22 14

01

financial
Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

With the perception that the level of corruption in the country This is discussed in the Perception of 10 Issues in the Nigerian is rising, it is believed that more Nigerian policy makers and market in 2010 section of the report. corporate leaders are losing the incentive to develop and rigorously implement good policies for their institutions. Some of our interviewees said the requisite rigour to think through policies has been lacking in Nigeria for some time. They We see a higher convergence of operational and some pointed out that with the level of insider dealing, political risk factors in the middle of the table. This system and rule manipulation and outright suggests political risks, or more specifically, electoral fraud which the Central Bank of Nigeria (CBN) audit revealed in the banks last year, corporate risk factors are seen less as capable of disrupting corruption is also weakening governance of business as usual in Nigeria in 2010. As a matter of fact, businesses in Nigeria beyond the level previously Electoral/Campaign Violence ranks in the 32 position. imagined. Currency Exchange Rate Volatility (147); Budget Implementation/Policy Failure (115); Investors Apathy (88); Failure to Attract or Retain Top Talent (84); Regulatory/Legislative Changes (81); Higher Input Cost (77); Poor Corporate Governance (76); and Cash Flow/Liquidity/Credit Crunch (75) complete the top 10 weightiest risks for the Nigerian market performances in 2010. The seven risks in the middle section (15 21) of the ranking of 35 risk factors we surveyed are: Fraud & Money Laundering; Vandalism /Sabotage; Weak Balance Sheets; Civil D i s t u r b a n c e s / L a b o u r U n r e s t ; A r m e d Robbery/Kidnapping/Accident; Distribution or Supply Chain Failure and Change of President. We see a higher convergence of operational and some political risk factors in the middle of the table. This suggests political risks, or more specifically, electoral risk factors are seen less as capable of disrupting business as usual in Nigeria in 2010. As a matter of fact, Electoral/Campaign Violence ranks in the 32 position. Some of our interviewers believe that the level of politicking countrywide will remain low in the first half of the year. With very little party activities seen in about 14 months to the next general election, Nigerian executives have put political/electoral risks only at the back of their minds. On the contrary, financial markets risks are seen to be more likely risks to the 2010 outlook for Nigeria, as they converge at the top of the ranking. The lowest point, and by implication the least weighty risks seen by the Nigerian executives for the market in 2010 is Domestic Debt Financing. It polled 14 points and was mentioned only seven times. The explanation given for this is that the federal government is seen to have a brighter outlook in 2010 in terms of revenue from sale of crude oil. Nigeria will meet its OPEC quota in 2010 attracted the highest point in the perception of variables that will define Nigeria this year.

Also, some of our interviewees believe the CBN will continue to support the domestic banking industry. They said the CBN will most likely keep the Monetary Policy Rate (the anchor interest rate) in the single digit band in line with its single digit inflation target, while the banking regulators will more likely support liquidity in the system, with maturities met as and when due. Finally, mention was also made of the expansionary nature of the 2010 budget, and the emphasis of the federal government on completing existing capital projects instead of starting new ones this fiscal year. Weather/Natural Disaster / Climate Change (22) is one step above Domestic Debt Financing at the bottom of the table, suggesting either low awareness of the global climate change concerns, in spite of the fact that the Copenhagen Climate Change Summit held last December at the time the survey was being conducted. Or it could be that Nigerian executives believe the country is seen not to be adversely affected by the risks in 2010. A significant number of the people we interviewed said they need to increase their level of awareness of climate change issues, especially emission mitigations. Others were also interested in the carbon credit market, which is seen to be a new area. We observed that this interest is more popular amongst bankers than any other group of professionals we interviewed. Weighted Ranking of Risks to Nine Issues in the Nigerian Economy in 2010 We measured perception of risks to nine issues in the Nigerian economy in 2010. The issues are risks to/in: Successful Take Off Of Nigeria's Vision 20: 2020 Nigeria's Competitiveness in Africa in 2010 Performance of the Domestic Economy in 2010 Banking Sector of the Nigerian Economy in 2010 Nigerian Capital Market Rebound in 2010 Nigerian Oil/Gas including Downstream Sector Power/Infrastructure Sector in 2010
FINANCIAL NIGERIA l JANUARY 2010

02

financial
Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

These issues are topical. The Federal Ministry of National Planning and National Planning Commission (NPC) relaunched the Vision 20: 2020 in November 2009.The core target of the development policy is that by year 2020, Nigeria will become one of the 20 largest economies in the world. Year 2010 is the first fiscal year to the takeoff of implementation of the policy. Although Nigeria's competitiveness as investment destination amongst the frontier emerging markets of Sub Saharan Africa (SSA) is crucial to the attainment of Vision 20: 2020, Nigeria's Competitiveness in Africa in 2010 factor becomes important discussion point as the region is expected back on the radar of foreign investors who had taken flights to safety during the global financial market crisis of 2007 2009. As portfolio activities and other private investment is expected to start to displace public investment through the stimulus packages and bailout funds around the world in 2010, SSA countries retain attraction for economic growth and good prospects for return on investment. The eight countries named in 2008 by the IMF as the frontier markets of SSA (Ghana, Nigeria, Uganda, Tanzania, Kenya, Zambia, Mozambique and Botswana) will compete for private investments targeting the region. This is expected to make domestic economic performance of keen interest to stakeholders in Nigeria. The last four issues have been subjects of concern and debate locally and internationally, lately. Reforms of the banking industry are on-going. The capital market rebound is a subject of interest, although investor apathy still stifles the market, as we found. The Petroleum Industry Bill (PIB) which harnesses new policy reforms in the Nigerian oil industry is before the legislature, even as the foreign oil companies have continued to voice their concerns about some provisions of the bill, which include increase in royalty fees paid to the government on oil blocks. This is at a time a number of oil block leases are due for renewal, and The Royal Dutch Shell wants to put for sale some of its oil blocks in Nigeria as part of rationalizing its investments around the world. The debate about deregulation of the downstream sector of the industry generates fierce debate. Power and infrastructure tie the issues together as the factors that have weakened economic growth in Nigeria. Because of its centrality to business and living, provision of electricity is the biggest issue for which citizens have continued to try to hold the present government of the federal republic accountable to its promise
FINANCIAL NIGERIA l JANUARY 2010

with regard to the increase of power generation target of 6,000 MW by last December. Tables 2 8 present the top 10 risks respondents have associated with these issues. Our survey questions in this section elicited perceptions of top five risks to each of the issues. The aggregate weighted responses are as composed below. Table 2: Perception of Top 5 Risks in 2010 to Successful Take Off Of Nigeria's Vision 20: 2020 This section presents the data on perception of ten positive

Table 3: Perception of Top 5 Risks in 2010 to Nigeria's Competitiveness in Africa in 2010

Table 4: Perception of Top 5 Risks in 2010 to Nigeria's Domestic Economy in 2010

03

financial
Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

Some of our interviewers believe that the level of politicking countrywide will remain low in the first half of the year.
Table 5: Perception of Top 5 Risks in 2010 to the Banking Sector of the Nigerian Economy in 2010

With very little party activities seen in about 14 months to the next general election, Nigerian executives have put political/electoral risks only at the back of their minds. On the

Table 6: Perception of Top 5 Risks in 2010 to the Nigerian Capital Market Rebound

contrary, financial markets risks are seen to be more likely risks to the 2010 outlook for Nigeria, as they converge at the top of the ranking.

Table 7: Perception of Top 5 Risks in 2010 to the Nigerian Oil/Gas including Downstream Sector 04 FINANCIAL NIGERIA l JANUARY 2010

financial
Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

Recovery of up to 25 per cent of oil that was shut in because of violence and sabotage of oil installation facilities in the Niger Delta is seen to be possible. However, the caution that attends this optimism is seen in the mean score of 3.42 from the highest possible 5 points. This is the same with the hope that the Nigerian banking sector will be stable in 2010. These suggest the reforms in the banking sector and oil industry should be kept on track and strengthened.

Table 8: Perception of Top 5 Risks in 2010 to the Nigerian Power/Infrastructure Sector

sentiments expressed on Nigeria for the year 2010. Using a perception scale of five (5) through one (1), we weighted the responses to each of the sentiments. Using a mean score of five (maximum points), we found that the highest positive sentiments (3.42) were expressed for: Nigerian banking sector will be stable in 2010 and Nigeria will meet its OPEC quota in 2010 in that order. From our interviews, it is believed that the stormy stage of the banking reform by the CBN is now in the past. The apex bank is lobbying the legislature for speedy passage of a bill authorizing the setting up of an Asset Management Company (AMC), which will purchase the delinquent loan assets of the banks. This is believed will free up the balance sheets of the banks from the heavy provisioning they made in the third quarter of 2009. Mr Tunde Popoola, CEO of CRC Credit Bureau says this will meet one of the three necessary conditions for the banks to return to performing their intermediation role of credit granting. The other two conditions he stated in our published interview are recapitalization of the banks and adoption and implementation of best practices in risk management. Some other executives we spoke to said concern about litigation will moderate potential hostile takeover of any of

the nine banks which were bailed out by the CBN in 2009. They believe this will translate to more transparency of the process of acquisition of any of the banks, although it could also mean that successful acquisitions might be long in coming. The positive sentiments on Nigeria regaining capacity to meet its OPEC quota is linked to the amnesty programme of the federal government which saw voluntary de-arming of the militants in the oil-rich Niger Delta area last year. Recovery of up to 25 per cent of oil that was shut in because of violence and sabotage of oil installation facilities in the Niger Delta is seen to be possible. However, the caution that attends this optimism is seen in the mean score of 3.42 from the highest possible 5 points. This is the same with the hope that the Nigerian banking sector will be stable in 2010. These suggest the reforms in the banking sector and oil industry should be kept on track and strengthened. However, the lowest positive sentiments were expressed for: Power will be more available in 2010 (2.45) and The budget will be implemented up to 80% in 2010 (2.0) out of maximum five 5 points. The insincerity that attended the failed promise of the federal government to increase electricity generation to its

FINANCIAL NIGERIA l JANUARY 2010

05

financial
Development and Financial Journal

Nigeria
JANUARY 2010

NIGERIA COUNTRY RISKS 2010

6,000MW target by December 2009 dampened any sentiment on the issue. Comments from the interviews we conducted on the issue sited the unnecessary distinction between generation and distribution made by some government officials as suggesting that there are two issues involved for Power will be more available in 2010. Government, it is said by our interviewees, is addressing only one issue when it is known that the power distribution infrastructure of the government monopoly - Power Holding Company of Nigeria (PHCN) - is dilapidated. Less than 60 per cent implementation of federal budgets since 1999 leaves little possibility for a huge jump to 80 per cent

None of the nine banks bailed out by the CBN is perceived to be most healthy bank in Nigeria. However, only 10 out of the 15 banks seen to be healthy by the CBN or those it recommended that should recapitalize, were seen to be most healthy. Conclusion, Limitation and Looking Ahead Financial Nigeria's Nigeria Country Risk 2010 report provides data based assessment of perception of risks in the country. It is our first attempt at doing that. Some of the findings in this report are not just informative, but they provide reference materials for policy makers and market leaders for the benefit of their decision making and execution. We are aware that a lot of the factors we measured can be quite fluid, altering the trend of opinions they would elicit as we progress into the year. Even at that, this report provides a researched background for the issues we measured in 2010. In that sense, it is a situation tracker. This year report is an effort to move risks into the consciousness of market participants in Nigeria. The limitation of the small number of respondents is a reflection of low level of awareness of risks in the business process or lack of interest or familiarity with risk reports amongst our population of mid-tier to toplevel executives. We administered by far more questionnaires than the respondents we got in the end. Our hope is that this report will bridge the awareness, interest or familiarity gap amongst our population, such that the next releases of this report would have significant increases in the number of respondents. But we are quite glad about the relatively large number of executives who speared us their time for the formal and informal interviews. We will always update the list of risks we measured to reflect current issues and improvement in the understanding of the situations as they affect the market. Through the process of conducting the survey to compiling the report, our view that Nigeria is in need of a regularly updated country risks report is strengthened. Therefore, Financial Nigeria's Nigeria Country Risks will be produced yearly and published every January, moving forward.
Jide Akintunde, Managing Editor, Financial Nigeria publications & CEO, Financial Nigeria International Limited. Chris Ogbodo, Senior Editorial Member, Financial Nigeria monthly development and finance journal. Contacts: +234 802 343 9098 Info@financialnigeria.com

implementation in 2010, comments from our interviewers suggest. Table 9. Perception of 10 Issues in the Nigerian market in 2010

06

FINANCIAL NIGERIA l JANUARY 2010