Nigeria Country Risks 2010

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FINANCIAL NIGERIA l JANUARY 2010 01

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

v ar io us s ec to rs o f t he e co no my a s

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 2010report section.

Asking how the array of risks we compiled in

the questionnaire applied to key issues andsectors 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 10sentiments on key definitive factors that will

characterize the Nigerian market and

operating milieu in 2010. Finally, we also

present the of

Nigerian banks that are perceived to be “most

healthy”.

“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),

a lt ho ug h i t w as t he m os t f re qu en tl y

mentioned.

weighted average mention

Ranking of Risks by Weight

“Weak Economic Growth Policy” lines just behind “Lack of Transparency/Corruption” as weightiest riskFinancial 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 itsNigeria

OPEC quota in 2010” are strongestpositive sentiments on

Nigeria Country Risks 2010

Weight

177

166

147

115

88

84

77

76

75

69

67

66

62

59

50

47

45

44

44

43

39

38

37

36

36

35

34

29

27

25

22

14

81

71

61

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

14

11

7

Inadequate Compliance/Enforcement of Rules

Competition with Other African Frontier Markets

Weather/Natural Disaster / Climate Change

Poor Quality Public Work/Fake Products

Budget Implementation/Policy Failure

Failure to Attract or Retain Top Talent

Armed Robbery/Kidnapping/Accident

Employee Dishonesty/Financial Theft

Government Policy on Energy Cost

External Shock from Lower Oil Price

Distribution or Supply Chain Failure

Lack of Transparency/Corruption

Currency Exchange Rate Volatility

Cash Flow/Liquidity/Credit Crunch

Civil Disturbances /Labour Unrest

Poor Employee Job Performance

Epidemic/ Environmental Pollution

Regulatory/Legislative Changes

Weak International Engagement

Weak Economic Growth Policy

Electoral/Campaign Violence

Poor Corporate Governance

Fraud & Money Laundering

Domestic Debt Financing

Risks

Weak Balance Sheets

Damage to Reputation

Inadequate Disclosure

Vandalism /Sabotage

Change of President

Inappropriate Tariff

Investors Apathy

Higher Input Cost

Imported Inflation

Job Insecurity

Loan Losses

Table 1: of Risks by WeightRanking

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Development and Financial Journal JANUARY 2010 NIGERIACOUNTRY RISKS 2010



FINANCIAL NIGERIA l JANUARY 201002

With the perception that the level of corruption in the country

is rising, it is believed that more Nigerian policy makers and

corporate leaders are losing the incentive to develop and

rigorously implement good policies for their

institutions. Some of our interviewees said therequisite rigour to think through policies has

been lacking in Nigeria for “some time”. They

pointed out that with the level of insider dealing,

system and rule manipulation and outright

fraud which the Central Bank of Nigeria (CBN)

audit revealed in the banks last year, corporate

corruption is also weakening governance of

businesses in Nigeria beyond the level previously

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 andsome 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

g en e ra l e l ec t io n , N i ge ri a n e x ec u ti ve s h a ve p u t

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.

This is discussed in the

section of the report.

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 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 newones this fiscalyear.

“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

ChangeSummit held last December at the time the surveywas

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.

Otherswere also interestedin 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.

We measured perception of risks to nine issues in the Nigerian

economy in 2010. Theissuesare risks to/in:

Successful Take Off Of Nigeria'sVision 20: 2020Nigeria's Competitiveness in Africa in 2010

Performance of theDomestic Economy in 2010Banking Sectorof the Nigerian Economy in 2010Nigerian Capital Market Rebound in 2010Nigerian Oil/Gas including Downstream SectorPower/Infrastructure Sector in 2010

Perception of 10 Issues in the Nigerian

marketin 2010

met

Weighted Ranking of Risks to Nine Issues in the Nigerian

Economy in 2010

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.

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These issues are topical. The Federal Ministry of National

Planning and National Planning Commission (NPC)

relaunched the Vision 20: 2020 in 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,

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 publicinvestment 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

stakeholdersin 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

apathystill stiflesthe 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 includeincrease 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

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

November

The Royal Dutch

Shell

Nigeria's

Competitiveness in Africa in 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 thissection elicited perceptions of top five risks to each of the

issues. The aggregate weighted responses are as composed

below.

This section presents the data on perception of ten positive

Table 2: Perception of Top 5 Risks in 2010 to Successful

Take Off Of Nigeria's Vision 20: 2020

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

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


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Table 5: Perception of Top 5 Risks in 2010 to the BankingSector of the Nigerian Economy in 2010

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

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.


Table 7: Perception of Top 5 Risks in 2010 to the NigerianOil/Gas including Downstream Sector

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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:

and

in that order.

From our interviews, it is believed that the stormy stage of the

banking reformby the CBN is nowin the past. The apex bank is

lobbying the legislature for speedy passage of a billauthorizing 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

“Nigerian banking sector will be stable in 2010”

“Nigeria will meet itsOPEC quota in 2010”

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:

“ (2.45) and “

(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

Power will be more available in 2010” The

budget will be implemented up to 80% in 2010”

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

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 Nigerianbanking sector will be stable

in 2010. These suggest the

reforms in the banking

sector and oil industry

should be kept on track and

strengthened.

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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

“ 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

implementation in 2010, comments from our interviewers

suggest.

Power will be more available in 2010”.

Table 9. Perception of 10 Issues in the Nigerian market in

2010

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

“mosthealthy”.

Financial Nigeria's 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 top-

level 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 thelist of risks we measured to reflect current

issues and improvement in the understanding

of the situations as they affectthe 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 will be

produced yearly and published every January,

moving forward.

Conclusion, Limitation and Looking Ahead

Nigeria Country Risk 2010

Nigeria Country Risks

Jide Akintunde, Managing Editor, Financial Nigeria publications & CEO,

Financial NigeriaInternational Limited.Chris Ogbodo, SeniorEditorial Member,FinancialNigeria monthly development

and financejournal.Contacts: +234802 3439098 [email protected]

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Nigeria Country Risks 2010