Nigeria: a lottery you might just win
LAGOS (Reuters) - The view of Lagos from the top of the Eko Hotel must be familiar to many of the fund managers and strategists who jet in to Nigeria periodically, scouting for investment opportunities.
In the distance, rows of bright lights reflect on the water like the skyline of any oceanside city. Elsewhere, dots of yellow flicker like fishing boats on the waves.
But Nigeria is full of paradox and the view is no exception.
The "skyscrapers" are in fact the living quarters of towering container ships importing everything from toothpicks to cement. The "fishing boats" are bars and shacks on the beach, their lightbulbs powered by erratic diesel generators.
From the roof-top bar, some read the vista as a story of great potential -- Africa's most populous country, swollen with oil wealth, an untapped market with massive infrastructure needs and all the financing opportunity that brings.
Others see a cautionary tale -- a nation so hobbled by corruption and mismanagement it struggles to turn on its own lights, despite more than half a century of oil production.
Either way, with a fast-growing population of more than 140 million and the ninth-largest proven oil reserves in the world, emerging markets investors can no longer afford to ignore it.
"I can remember years ago ... nobody would come to Africa with me," Jonathan Auerbach, co-founder of New York-based stock broker Auerbach Grayson, said during a recent trip to Nigeria with more than a dozen fund managers from around the world.
"Investing in Nigeria today is like buying a lottery ticket with a very high percentage chance of winning," he said, adding that at less than $40 billion, Nigeria's stock market was valued at less than half U.S. investment bank Goldman Sachs (GS.N).
"You know what that tells me -- Nigeria is so cheap."
ANOTHER ASSET BUBBLE?
Some analysts say Nigeria's stock market .NGSEINDEX, the second biggest in sub-Saharan Africa after Johannesburg, could rally more than 40 percent this year. Foreign funds are starting to return after a lull during the global credit crisis.
An unprecedented $4 billion bailout of nine banks last year and ongoing reforms to the sector make bank stocks particularly keenly watched in a nation where just 23 million people have bank accounts.
The sector, which accounts for more than 60 percent of stock market capitalization, has risen more than 24 percent this year already, albeit from a very low base.
Sentiment is being driven largely by optimism over a planned state "bad bank" which could soak up around 1 trillion naira ($6.7 billion) in non-performing loans, and by low interest rates which have seen asset managers switch into equities to beat low returns elsewhere.
The rally comes despite anemic growth in banks' underlying business -- since the bailout, bank credit to the private sector has remained flat at around 0.3 percent from growth of 25 percent at the peak of the stock market boom in 2008.
"This market has moved up too quickly," said one insurance fund manager who has 14 billion naira under management.
Investors brave enough to buy Nigerian equities three years ago were rewarded with one the world's best stock market returns. Those who failed to exit by the second quarter of 2008 found themselves exposed to one of the worst.
Banks buying up their own shares, high levels of margin lending, and a general belief among inexperienced retail investors that the market could only go up built up an asset bubble that inevitably burst.
The collapse of the Nigerian market came almost in tandem with the global credit crisis and many Lagos financiers -- as well as some of those in government -- are quick to blame events in Nigeria on the withdrawal of foreign investors.
But in reality, lax regulation and malpractice on the part of some, if not many, banks had a large role to play.
"If you look at the history of what's happened over the last cycle there was a certain level of collaboration between brokers and banks ... with respect to share manipulation and so forth," said Sonnie Ayere, head of investment firm Dunn Loren Merrifield.
"There is a lot of work being done at the (Nigerian) Securities and Exchange Commission ... to prosecute whatever companies are actually found guilty."
On regulation at least, Nigeria appears to have learned some lessons.
THE QUIET TECHNOCRATS
Central Bank Governor Lamido Sanusi delivered the first blow last August, shattering the complacency of bankers, brokers and regulators, members of a cozy elite who had become too close and long believed themselves immune from prosecution.
Sanusi's "Friday massacre" -- the first installment of what would become the $4 billion bailout -- set BlackBerries buzzing not because of its financial scale, but because of the might of the egos and empire builders felled by his axe.
Bad debtors, including politicians and top businessmen, were named in national newspapers. The softly spoken central banker, clad in trademark bow-tie and frameless spectacles, pledged that those guilty of misconduct would be prosecuted.
Sanusi has since promised further reform including abandoning the universal banking model to separate core lending from capital market speculation, echoing similar plans mooted in the United States. He has also vowed to burst any new asset bubble by "starving it of oxygen".
He has never professed any interest in standing for public office and his stellar private sector career -- to which he could always return -- has allowed him to rise above the vested political interests that hampered some past regulators.
Many investors hope the new Securities and Exchange Commission head, Arunma Oteh, is cut from the same cloth.
A former vice president of the African Development Bank who has spent much of her career outside Nigeria, Oteh has also been insulated from the political pressures at home.
She has promised tighter regulation and surveillance to protect investors against the kind of market abuse that contributed to last year's asset bubble.
"What we saw with the global financial crisis is something that has allowed us to understand better the value of regulation," she told Reuters.
LONG-TERM CREDIT LACKING
Tighter regulation may please investors and help make Nigeria's capital markets more mature, but 12 floors below the clinking cocktail glasses of the Eko Sky Lounge, it is hard to see how it will immediately help the real economy.
Marcus Oluwole, 28, has spent a decade trying to grow his Slyce hair salon, a wooden shack with three broken office chairs, two cracked mirrors, and a noisy generator to power his electric clippers. He has frank advice for investors in Nigeria:
"If your business is based on electricity, if you need power, you should forget it," he said as he swept the floor.
Like many young entrepreneurs, Oluwole's ambitions -- he would like to expand into manicure and pedicure, buy "executive" chairs and fit the salon with a TV -- have faded in the face of the brutal realities of doing business in Nigeria.
"The banks will not give you a loan and, if they do, they charge high and the loan is very short. They expect you to pay back in 3 months. With no light, the generator on all the time, how do you want me to repay?" Oluwole said.
His may be a tiny business, but Oluwole's predicament is echoed across sub-Saharan Africa's second-biggest economy.
The central bank has left its benchmark interest rate at 6 percent since last July -- despite double-digit inflation -- to encourage banks to grow their loan books and pumped 1.2 trillion naira ($8 billion) in subsidized credit into the economy, but the impact has been limited.
Consumers and businesses are feeling the pinch. Car imports fell by more than half in the first quarter compared with a year earlier, with dealers largely blaming weak credit flows. Construction projects stand unfinished around Lagos.
"Funding to complete these projects is going to be a nightmare," said Bismarck Rewane, the chief executive of Lagos-based consultancy Financial Derivatives.
"The flows from outside to support investment-banking type projects, private-equity type projects, which had just started have all but collapsed ... Now all the commercial banks have gone back to the typical short-term trade finance," he said.
LET THERE BE LIGHT
At least one variable that has long troubled investors in Nigeria is now less of a concern -- political instability.
Financial markets largely shrugged off the prolonged ill-health of the late president, Umaru Yar'Adua, who died earlier this month and uncertainty has eased further since Goodluck Jonathan, Yar'Adua's deputy, was sworn in as head of state at the beginning of May.
Jonathan has appointed his own cabinet, including former Goldman Sachs executive Olusegun Aganga as finance minister. Aganga has said he favors a sovereign wealth fund for Nigeria's windfall oil revenues, which all too often have been squabbled over and squandered by previous administrations.
The choice of Aganga may have reassured some investors who were concerned a new administration may try to roll back some of Sanusi's reforms. But with elections due by next April, his time to enact any real change is limited.
The biggest frustration for ordinary Nigerians and businesses alike is electricity, where successive administrations have promised but failed to deliver progress.
Nigeria produces around 3,000 megawatts (MW) of power but a lack of maintenance at power stations means generation often plunges to less than 1,000 MW. South Africa, with a third of Nigeria's population and itself battling chronic power shortages, has over 10 times the capacity.
Its epileptic power supply is perhaps the greatest paradox in Africa's biggest energy producer, forcing businesses and individuals to rely on expensive diesel-powered generators.
But in Lagos, a city of budding entrepreneurs and hustlers, there is always a profit to be made.
Among the honking yellow buses, under the concrete pillars of a motorway flyover, Jamil Idriss, 20, charges 50 naira ($0.33) to recharge cellphone batteries using dozens of three-pin sockets nailed to a wooden board and hooked up to a generator.
Next to him is a laptop balanced on a wooden stool. He charges 30 naira to download a ringtone or track of music to an MP3 phone, and 50 naira for a short video.
"When I buy 200 naira fuel, I'm hoping to achieve at least 3,000 naira, sometimes 5,000," Idriss said.
Not a bad return. But if he had electricity he is sure he would make more, from a proper repair shop.
If Nigeria's private sector grows as Auerbach and other investors hope, and Idriss and those like him can be brought out of the vast informal economy into the formal sector, its huge potential may start to be unlocked.
"We are in the midst of global ... generational change and I simply call it the leveling of the global economic playing field," Auerbach said.
(For full Reuters Africa coverage and to have your say on the top issues, visit: af.reuters.com/ )
(Additional reporting by Yinka Ibukun; Writing by Nick Tattersall; Editing by Sara Ledwith and Simon Robinson)
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