Nigeria Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	68
ISBN Number	not applicable
Product Code	BMI03425

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Summary

The Worst Case Becomes The Core View Last quarter we ran a scenario test about the implications to Nigeria if average oil prices in 2009 fell to US$50.00/bbl: this scenario has now become our core view, and the various challenges we outlined in the scenario test have manifested themselves. Nigeria's government, facing substantially lower oil revenues in 2009, will push through a large fiscal deficit, which we believe will be financed via the excess crude account. Meanwhile, growth is forecast to fall below 4.0% for the first time since 2000, with risks to the downside. As we warned, export receipts will fall by a large amount, but a devaluation of the naira leads us to believe the cost of imports will also decrease by enough for the country to maintain a slim current account surplus. Meanwhile, one of the most pressing risks for the country in 2009 and 2010 will be a widespread crisis in the banking sector, which is facing sizeable domestic and international challenges.

On the political front, the authorities have reacted to the worsening economic situation with a budget that pushes expenditure up, at the cost of a large deficit. While the authorities have stated they intend to cover the cost of expenditure's overreach with a combination of one-off financing sources and international and domestic borrowing, we believe the country will eventually opt to make use of its oil savings. The excess crude account is large enough more than fully to cover the 2009 deficit, and we believe tapping its resources may have a lower long-term impact on public finances than borrowing at presently high rates of interest.

The sudden and sharp devaluation of the naira has ended talk in Nigeria that the country is insulated from the global economic crisis, and we believe the exchange rate has further to fall in the medium term, despite the efforts of the central bank to control banks' ability to access foreign currency.

The global recession will particularly hurt the prospects for investment in 2009; and, on the back of a large contraction in gross fixed capital formation, we are forecasting significantly reduced real GDP growth in 2009. Indeed, we highlight the risk of outright contraction, particularly if the Nigerian banking sector suffers widespread collapse on the back of lower oil revenues and looming losses from exposure to the Nigerian stock exchange.

Physical infrastructure needs improvement; the government is committed to supporting its growth, both by prioritising expenditure in the budget and by attracting investment from the Middle East.

That said, we warn that the risk of a major banking crisis in 2009 or 2010 could jeopardise such investments, posing long-term risks to the business environment. We are cautious about the apparent progress in the fight against corruption, after the country moved from 147th place to 121st place out of 180 countries in Transparency International's 2008 Corruptions Perceptions Index, as anecdotal evidence suggests the fight against corruption has moved backwards.

Content

Executive Summary
- The Worst Case Becomes The Core View
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Fiscal Policy
- Deficit Financed Budget For 2009
- We believe the governments 2009 federal budget deficit will be larger than it is forecasting, due to lower than
- targeted revenues on the back of a significant slowdown in growth
- Table: Political Overview
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Growth To 3.6% In 2009
- On the back of falling oil prices, the global economic crisis and domestic bank problems, we see investment in Nigeria
- contracting in 2009, leading to a fall in overall real GDP growth from 6.3% in 2008 to 3.6% in 2009
- TABLE: ECONOMIC ACTIVITY
- Exchange Rate Policy
- Downside Pressure On Naira To Persist
- While we believe the naira could find short-term support around NGN150.00/US$, we believe a further devaluation to
- NGN165.00/US$ or even lower is on the cards in the medium term, though we would expect the currency to retrace back to
- NGN150.00/US$ by the end of 2009
- TABLE: EXCHANGE RATE POLICY
- Balance of Payments
- Current Account Surplus To Survive
- Despite the major drop in the oil price, we see Nigeria maintaining its current account surplus, as a weak naira and falling
- oil import costs significantly reduce the import bill
- TABLE: BALANCE OF PAYMENTS
- Banking Sector
- Banking Sector Crisis In 2009, 2010?
- While our core view is for a slowdown in the growth of the Nigerian banking sector, we believe there is a risk that cannot
- be discounted of a major crisis in 2009 or 2010, though a lack of transparency makes evaluating the risks difficult
Chapter 3: 10-Year Forecast
- The Nigerian Economy To 2018
- Infrastructure Investment Is Key
- We are forecasting average annual real GDP growth of 6.1% over the next 10 years. We expect the Nigerian government
- to prioritise investment in vital infrastructure through the end of our forecast period and beyond
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political upheaval
- in China
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine to
- spell trouble for the financial services sector in 2009
- table: Banks Leverage Ratios
- table: Assets As % of Home Country GDP
- table: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- table: Exposure As % of Tot al Exposure To Region
- table: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- TABLE: MIDDLE EAST & AFRICA ANNUAL FDI INFLOWS
- Market Orientation
- TABLE: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: Key Sectors
- Agribusiness
Executive Summary
- We feel that the efforts undertaken by Nigeria to try and diversify production away from oil reliance are good news for
- agricultural production, and food security will benefit as a consequence
- TABLE: Milk Production, Consumption & Trade
- TABLE: Poultry Production, Consumption & Trade
- Infrastructure
Executive Summary
- Despite all odds, Nigeria has the potential to become one of the largest construction markets in Africa
- Table: Const ruction and Industry Data
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLOBAL ASSUMPTIONS
- Table: GLOBAL AND REGIONAL REAL GDP GROWTH, % chg y-o-y
- Economic Activity
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGI NG MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- Monetary Policy
- TABLE: EMERGI NG MARKET EXCHANGE RATES