Nigeria Has Higher Investment Risk, Beats Sub-Saharan Africa Peers On Returns

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  • Drops Out Of RMB ’S Top 10 Investment Destinations for First Time

(Sundiata Finance) – Among Africa’s top three economies, it is Nigeria that offers both the highest risk and highest reward to investors, according to a Risk-Reward index developed by global risk consultancy firm, Control Risks Group Limited.
The “Africa Risk-Reward” index computed by UK-based Control Risks, in partnership with NKC Economics, aims to give a clear assessment of the investment climate in African countries to investors, to enable them accurately measure each country against their own appetite for risk, with full knowledge of the challenges they are likely to face.
Nigeria’s ranking is impacted by a shrinking economy and militancy, while security risks and escalating risks, mean Egypt and Africa, respectively, are sometimes on the investment radar for the wrong reasons.
However, Nigeria and its energy sector are too big to be brushed aside, according to Control risks, thereby earning Africa’s largest oil producer a reward score of 6.0, ahead of its peers.
Despite a high reward score, Nigeria’s charms fade against a risk score of 7.3, which also beats that of its sub Saharan Africa peers.
“Views on Nigeria can tend towards the extreme. Some businesses we talk to are so deterred by coverage of terrorism and violence, and what they feel are insurmountable problems of corruption, that wherever they look, they see reasons not to work in Nigeria, while others are so drawn by the size of the potential market and the rewards, that they can be tempted to overlook the risks,” said Daniel Magnowski, Senior Analyst, Control Risks.
“When we are talking about Nigeria, we keep coming back to the phrase ‘challenging but manageable’ and it’s absolutely right, whether that’s in oil blocks, power stations, hotels or telecoms,” Magnowski added.
Nigeria’s risk and reward scores compare to Africa’s 4.8 reward score and less than 5.0 risk score; and Egypt’s 5.5 reward score and 6.0 risk score.
Africa’s three largest economies, however come up short in comparison to East African powerhouses, Ethiopia and Kenya. Ethiopia outperforms all other African peers on the reward score, with 8.0. Its high reward score is accompanied by a risk score of 5.8..
Kenya’s reward score is 6.7 while its risk score is 5.6.
In a separate report by Rand Merchant Bank, released Monday, Nigeria dropped seven places to 13, as the most attractive investment destination in Africa, while Africa also ceded top spot to Egypt.
This is the first time Nigeria will not feature in the top 10 most attractive investment destinations report by Rand Merchant Bank, one of the largest groups in Africa, because the country’s short-term investment appeal has been eroded by recessionary conditions.
Neville Mandimika, RMB Africa analyst and contributor to ‘Where to Invest in Africa 2018’ said, “The last three years have sounded an alarm, amplifying what is now a dire need for the economies of Africa to shift their focus from traditional sources of income to other viable alternatives.”
According to the report, Morocco retained its third position for a third consecutive year, having benefitted from a greatly enhanced operating environment since the “Arab Spring” which began in 2010.
Ethiopia, a country dogged by socio- instability, displaced Ghana to take fourth spot, mostly because of its rapid economic growth, having brushed past Kenya as the largest economy in East Africa. Ghana’s slide to fifth position was mostly due to perceptions of worsening corruption and weaker economic freedom.
Kenya holds firm in the Top 10 at six. Despite being surpassed by Ethiopia, investors are still attracted by Kenya’s diverse economic structure, pro-market policies and brisk consumer spending growth. A host of business-friendly reforms aimed at rooting out corruption and steady economic growth helped Tanzania climb by two places to number seven.
Rwanda re-entered the Top 10 having spent two years on the periphery, helped by being one of the fastest reforming economies in the world, high real growth rates and its continuing attempt to diversify its economy.
Tunisia occupied the ninth position on the back of advancing transition and an improved business climate achieved by structural reforms, greater security and social stability.
Cote d’Ivoire slipped two places to take up the tenth position, despite a low business environment score which was compensated by its government’s significant strides in inviting investment into the country, leading to a strong increase in foreign direct investment over the years, making it one of the fastest growing economies in Africa.
Uganda’s outlook is marred by a tumultuous 2016 and related uncertainty, debilitating drought and high commercial lending rates. Botswana, Mauritius and Namibia, widely rated as investment grade economies, did not feature in the Top 10 mostly because of the relatively small sizes of their markets. Market size is a key consideration in the report’s methodology.
The report warns that African economies could hover on the brink of disaster, if they continue to depend on their current economic fundamentals and do not usher in economic diversification.
Nigeria’s economy, which vies with Africa as the largest on the continent, has been battered by the fall in oil price and lower production (a result of a resurgence of militant attacks in the Niger delta).
These factors dragged GDP growth down from 6.3 per cent in 2014 to 2.7 per cent in 2015, with the economy actually contracting by 1.6 per cent in 2016.
However, Nigeria managed to make a narrow exit from recession, as the economy grew 0.55 per cent in second quarter 2017, the first growth in six quarters according to data compiled by BusinessDay and sourced from the National Bureau of Statistics (NBS). Growth was driven by improving oil production volumes and prices which trended higher in the period compared to a year ago.
The dollar shortage brought on by declining petrodollars has also abated since the introduction of the NAFEX window in April, which caters to the dollar needs of investors.
These factors are gradually boosting investor confidence in Nigeria, as deduced from the trend in capital importation in the three months through June. (BusinessDay)