Thursday, November 20, 2008

Nigeria....Safe??

A somewhat positive ranking for a change. But as much as Nigeria has been ranked the least vulnerable economy in the world by Merrill Lynch, we do have to think about the implications of being an oil-dependent economy (a very vulnerable resource in terms of pricing). Oil contributes 20% directly to the GDP. Given the recent decline in oil prices, one can expect that a further decline will contract our GDP causing government revenues to fall. Now, of course not everyone's as pessimistic as I am about this ranking, if the recent run on the Nigerian Stock Exchange is anything to go by, Nigerians should proceed with caution at this seemingly good news...

Nigeria: Merrill Lynch Ranks Country World's Safest Economy - allAfrica.com

A major boost was given to Nigeria's quest for foreign investment inflow at the weekend as the country was named the least vulnerable economy in the world, according to a report, Global Economics, compiled by a team of experts from Merrill Lynch.

The report, a copy of which was made available to THISDAY at the weekend, was compiled following several data requests from clients of the investment bank for key risk indicators for all major economies including Europe, the Middle East and Africa (EMEA).

According to the statistics, the world's 10 least vulnerable economies are Nigeria, Mexico, Phili-ppines, Colombia, Egypt, Oman, Indonesia, Peru, China and Russia.

Also, the report identified Australia, Switzerland, Korea, Romania, Hungary, Sweden, Bulgaria, Euro area, United Kingdom and the United States of America as the highest risk economies in the world.

The risk ranking was based on seven indicators and they are - current account financing gap, foreign exchange reser-ves/short-term external debt ratio, private credit-to-Gross Domestic Product (GDP) ratio, and private credit growth, loans to deposits and banks capital-to-assets ratio. Merrill Lynch said the report also addressed all the requests in 62 indicators of the 60 world economies.

According to the report, Nigeria, with a population of 141.41million, was able to record a 7.3 per cent growth in GDP, with its Consumer Price Index hovering at 11.5 per cent, its current account balance, fiscal balance and public debt at 6 per cent, 6.3 and 10.4 percentage respectively.

To determine its external vulnerability, Nigeria's external debt position was put at 12.9 per cent of the GDP, while external debt /exports ratio was put at 9 per cent. Her forex reserves totalled $60.8billion.

The percentage of Nigeria's total external debt in relation to the GDP was put at two per cent, total foreign claims is $15.3billion while international claims stood at $13.1billion.

The report stated that the percentage of Current Account Balance plus net Foreign Direct Investment of the Nigerian GDP was 34, Forex reserves/short-term external debt totalled 41, while percentage of export of the GDP was 38 point.

The percentage of private credit of GDP was 43, while the percentage of bank capital to assets, according to Merrill Lynch was 41.

The 10 most vulnerable countries, which are mostly European countries, were said to have exhibited worse balance of payments positions, stretched external debt service ratios and overleveraged financial systems.

Explaining further on how it put the report together, Merrill Lynch states that: "While we believe that our country risk ranking produces plausible results, one needs to be aware that, as any ranking of that type, it is highly sensitive to the selection of indicators employed. For example, developed countries can probably sustain higher external vulnerability indicators than emerging markets; some Euro area country statistics are possibly misleading given there is a monetary union."

In their reactions, the leadership of the Nigerian organised private sector said the various investment-friendly programmes put in place especially in the past five years largely gave Nigeria a pride of place in the ranking.

Immediate past Director-General of the Nigerian Economic Summit Group (NESG), Dr. Mansur Ahmed said the latest ranking has confirmed that Nigeria is indeed an investors-haven. The feat, he said, should be traced to a regime of consistent and sustained improvement in the nation's fiscal management.

Speaking with THISDAY in a telephone interview yesterday, Ahmed acknowledged that Nigeria has been able to maintain a healthy foreign exchange management, low budget deficit and heavily low external indebtedness, which he said have combined to grossly reduce the nation's level of risk. He said those indices have also endeared the nation's economy to foreign investors.

According to the incumbent DG of the NESG, the key indicator to the safety of investment in Nigeria is the freedom to invest in any part of the country without government's intervention. He maintained that issues like hostile acquisitions, or government take-over is not common in Nigeria, explaining that even in cases where government reversed policies, it is always limited to government investments.

"In Nigeria, people can invest anywhere without hindrance. Other important considerations are the sheer size of the Nigerian market and underlying macro-economic issues," Ohuanbuwa said.

He noted that although investors in Nigeria are still complaining of high cost of doing business, the level of risk is far lower than what obtains some other economies of the world.

On measures to improve on the latest ranking, the experts were unanimous in their call for the sustenance of investor-friendly policies by the government.

Ahmed emphasised the need for effective management of the nation's foreign asset especially in the face of the dwindling prices of crude oil at the international market.

Ohuanbuwa charged the government to liberalise the economy by removing all hindrances to the economy.

13 comments:

NigerianDramaQueen said...

Seeing as Merril Lynch's instincts/predictions couldn't save them from bankruptcy or being bought out by Bank of America, I wouldn't particularly go by what they say...not right now at least.

Nigeria does seem to be less volatile than the rest of the world though. The Economist did note last week however that:
-The stockmarket in Lagos performed a little poorly due to local factors (and not the global crisis)
-Plunging commodity prices and reduced foreign demand will affect the already diving oil price in Nigeria.

On the flip side, the Naira has held up better than almost all other African currencies including the rand and the IMF predicts that all of Sub-Saharan africa should expand by 5.9%---far more than the worldwide 3%

so i guess all's not lost:-)

Ms Sula said...

Funny enough, this makes A LOT of sense to me. The Nigerian Economy (and that of many other sub-saharan African countries)does not dabble a lot in credits (if at all). Rather, the banks have a lot of cash and are able to do a lot more. The boost contributed by crazy oil prices in the past year has certainly left a lot of residual excess money.

Also not to be neglected is the constant influx of money from abroad by expats. It seems to be a perfect "storm" of sorts to create a stable economy. What was once considered our Achilles Heel is now being revealed as our strength: the lack of sophisticated financial instruments. In this global recession, it's back to the basics for everyone. Good thing is African economies haven't stretched that far from the Basics in the first place.

The next step in my humble opinion would be for Nigeria(and all the subsaharan countries with a surplus) to invest in local Infrastructures development right now. The Chinese model of investing in US Bonds and the likes will not work in the current climate.

I hope our leaders are discerning enough to seize this opportunity to become (somewhat) of a player in the global economy.

Great article!

Jinta said...

i wonder if its because we're a cash economy and product-based (albeit only oil), while the vulnerable ones offer (mostly financial) services

TheAfroBeat said...

@ Jinta & Ms Sula, Definitely true that for a change our lack of sophisticated finance/credit systems, and the fact that we still haven't transitioned from an agrarian to industrial let alone a service economy, is playing in our favour.

Ms. Sula, I'm right behind you on encouraging the developing economies to invest in local infrastructure but if we didn't do that when oil was $150 pb, i doubt they're going to be going one step further when it's dropped below $50. I just don't see it.


Lol @ NDQ and ML credibility. And your point about the NGN is true and positive, being pegged to the USD seems to have paid off over the past year.

SOLOMONSYDELLE said...

A friend sent this to me last week. I searched high and low for the original ML report to no avail.

Anyway, it is nice to see something positive about Nigeria, but it is saddening that it came from a company that went down the drain.

Robert said...

Now all you have to do is stop the bloody scamming and you will be taken seriously.

Jaja said...

Of course. Makes sense. Thing is, the stronger our economy become the more involved we will be in global financial fields.

So what will oil price plummeting... Isnt that the only thing we have decided to feed on? Or do we have anything else?

Jaycee said...

Still isn't safe...

deola said...

It feels good to be here.

guerreiranigeriana said...

...interesting...i am with ms. sula...but seeing as nigeria is contemplating (dunno what they finally decided) taking a $3bn loan from world bank, its highly doubtful that those bobos will do what actually makes sense...we can only pray, maybe...

Barbarella123 said...

I think we are one of the least vulnerable becos we are a cash based society rather than credit based.. One the credit culture catches on (which it seems to be doing right now), it will be a totally different story..

NaijaBabe said...

Yes I agree with what quite a lot of people have said, the fact that we are a cash based economy makes us less prone to economy crashes like the one the UK suffers from at the moment, so much so that VATS have been cut by 2.5%.
I also think that we are very lucky because even though our currency is worth 190naira to a pound, our smallest denomination is 1naira and not 1000cedis...in that context, i still think there is hope for the nigerian economy. I'd rather invest in nigeria where I know its stable and less likely to crash than worry about another wall street crash in the near future.

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