Nigeria overtook South Africa to become Sub-Saharan Africa’s largest economy in 2013. Measured against African yardsticks, Nigeria performs well for growth, per capita income and creditworthiness, but not ease of doing business. Slumping oil prices and the Boko Haram insurgency pose risks to the outlook.
Growth will expand at a solid pace, but risks have risen. Growth has averaged an impressive 8.2% p.a over the last decade, but is projected to stabilise around 5.5% over coming years. The oil sector will remain key, accounting as it does for 70% of government revenues and 80% of exports. Muhammadu Buhari’s surprise win at the March presidential elections suggests the electorate favours his anti-corruption mandate. The new president is promoting development projects by reducing recurrent spending in next year's budget. A steady rise in output from agriculture, ICT, trade and services adds further upside to the outlook.
But falling oil prices, large fiscal and current account deficits pose risks. The recent slide in oil prices has forced the government to revise down the oil price in its 2015 budget to US$53/bbl. On one estimate, oil prices must rise to US$120/bbl to achieve budget balance. The government must decide on severe budget cuts or risk a slide into fiscal and external insolvency. Lower oil prices have also weakened external buffers with the current account expected to record deficits in 2015 and 2016. Foreign reserves have also fallen 16% since December 2014 as policymakers have tried in vain to stem naira depreciation.
Nigeria’s large fiscal and current account deficits leave it vulnerable to rising US interest rates and growing investor risk aversion. The central bank has also introduced restrictions on currency trading to stabilise the naira, but this has not gone down well with foreign investors.
Nigeria’s per capita income has risen on average 12% p.a over the last 15 years driven predominantly by elevated commodity prices over much of that time. But the sharp deterioration in oil prices will weigh on household incomes over the coming years.
Nigeria has an OECD country credit grade of 5 and speculative grade sovereign debt ratings from all three major ratings agencies. These ratings underline Nigeria’s vulnerability to business, financial and economic setbacks.
The World Bank’s ease of doing business gauge — which measures regulation and red tape relevant to a domestic small to mid-sized firm — ranks Nigerian 170 out of 189 economies. Starting a business, gaining construction permits, connecting electricity, registering property, paying taxes, trading across borders and enforcing contracts are all difficult.
The World Bank ranks Nigeria in the bottom quartile for all but one dimension of governance. Nigeria also falls behind the sub-Saharan average for corruption, rule of law, regulatory quality, government effectiveness, political stability, and voice and accountability. The Boko Haram insurgency continues to raise the risk of widespread violence.
Nigeria is Australia’s 53rd largest goods export market. Australia’s goods exports to Nigeria totalled $97m (0.1% of total goods exports) in the six months to June 2015. Major exports included wheat, animal oils and fats and motor vehicles. But the promise of the market is huge. A report from the McKinsey Global Institute suggests the Nigerian consuming class could quadruple to 160 million by 2030, to become larger than the current population of France and Germany combined.
Service exports could be one beneficiary of this ‘bourgeoisification’. Though negligible now, they could expand thanks to the burgeoning demand for international education. Nigerian student enrolments in Australia might be only 0.2% of total enrolments, but they have grown close to 30% annually since 2009. To lift the profile of Australian universities, the Australian government has awarded scholarships to Nigerian students wishing to study at Australian universities.
Bilateral investment between Australia and Nigeria is miniscule. But several Australian companies do business there, including engineering and construction firm Worley Parsons, mining companies Australia Mines and CGA Mining.
Department of Foreign Affairs