For decades Nigeria has been a hobbled giant, its vast resources held hostage to corruption, violence, and underdeveloped infrastructure. However, there is optimism that government reforms will help rejuvenate the economy and trade. Zoe Alsop reports on country eager to make a break from its past.

When international observers termed April 2007 elections flawed, it looked as though Nigeria might hold onto its reputation as perhaps the world’s most dysfunctional state. But, 18 months later, there is cautious optimism among bankers and financial analysts, who say there’s been real progress towards normalising a once mercurial business environment.

They point to a newly consolidated banking sector, more disciplined fiscal policy buttressed by an oil stabilisation reserve, and real incentives to diversify Nigerian exports and tap into vast natural gas reserves.

“You look at a country that has been under military dictatorship for more than three quarters of its independent life and has all of a sudden found democracy as quite a useful process,” says Tony Uzoebo, business development manager with Zenith Bank (UK). “It’s more than stability. If you look at the underlying economic environment, you can see that all the indicators are moving up.”

But President Umaru Yar’Adua’s government has many challenges ahead. Foremost among those will be finding a solution to four decades of turmoil in the Niger Delta, where it was estimated that 10% of oil production in 2007 was lost to the bunkering activities of well-connected gunmen. Recently Royal Dutch Shell claimed that at least 220,000 barrels per day (bpd) are lost to militant attacks. Amid the bedlam, infrastructure is destroyed and new work is delayed, leaving the country more than a million barrels short of potential production capacity.

Local banks are optimistic that Yar’Adua’s measures will be effective. “The challenge has been taken seriously by the current government,” remarks a Nigerian banker. “The end is in sight for the clashes of the Niger Delta.”

And the stakes are huge. Like much of Sub-Saharan Africa, Nigeria has the opportunity to capitalise on the continent’s relative isolation from the global financial turmoil.

The tumbling oil prices are also having limited effect, so far, it that they are still far higher that the US$59 per barrel estimate the Nigerian government used to plan its N2.75tn budget.

Although the credit crisis has resulted in some investors pulling out of the market, trade finance remains an open, popular and buoyant market despite the financial turmoil.

“Trade finance is a lower risk in a hostile operating environment than the wholesale market,” says Marcus Hopkins, CEO of Intercontinental Bank (UK). “Whereas wholesale markets are very severely restrained, the trade finance markets remain open because you are financing a very regular source of trade and that tends to be the import of goods for which there is a reliable demand in the country.”

Suitors beyond the Sahara
Nigeria has estimated 5.2tn metres of proven gas reserves including both liquefied natural gas (LNG) and associated gas produced during the production of oil. Until recently, the focus has been on oil extraction and a deadline to end gas flaring this year looked likely to slide back years. But Russia’s tightening grip on western Europe’s access gas has changed that.

Investors, environmentalists and people living in the Niger Delta have been bemoaning wasted opportunities to harvest the 24bn cubic metres of gas Nigeria’s oil industry still flares each year.  This summer’s short war in Georgia has acutely focused European attention on Nigerian gas.

Asserting itself in Georgia, Russia loomed large over European Union plans for a 3,300km pipeline meant to connect Europe to central Asia through the southern Caucasus.

EU anxiety that Russia would consolidate a near monopoly on gas supply to Europe rose when Russia’s Gazprom signed a memorandum of understanding with the state-owned Nigerian National Petroleum Corporation (NNPC) to co-operate on gas exploration, production and transportation this September.

Within days, the EU – keenly aware of western dependence on Russian fuel – announced its intention to promote a 4,300km, £12bn trans-Saharan pipeline that would pump Nigerian gas directly to Europe.
Zenith’s Uzoebo says the Russian MoU does not signal a tilt away from traditional trade partners.

“The presence of the Russian majors has always been there,” he says. “But historically Nigeria is an economy of Britain. Therefore its trade relationship with the UK will always be the number one priority, just like trade with France and the US. It’s all a question of who wants what.”

But, by placing its financial and political clout behind the ambitious pipeline project, which would pass through fractious regions of Niger and the Sahel desert, the EU is taking it a step closer to reality.

“The strategic importance of this pipeline makes it financeable,” Intercontinental’s Hopkins says. “Environmentally it’s also very important.”

Whoever wins access to Nigerian gas will have to win the approval not just of the government, but also among the many factions of the Niger Delta.

Though Nigeria is seventh in the world in terms of natural gas reserves, it is only able to fill a tiny percentage of domestic demand for electricity, a deficiency many consider the largest brake on economic growth there. This September, the government said it would consider suspending the LNG projects of foreign energy firms unless they submitted detailed plans by the end of October on how they would supply gas for domestic power generation.

And without support from the groups in the Delta, operators will be forced to work under siege conditions.

“Whichever side ends up actually physically in control – whether it’s Russia or Western Europe – the key issue is to see how the concession was awarded,” says OB Sisay, deputy head of Africa at Exclusive Analysis. “If it’s awarded transparently, good. If not, then there is more risk.”

Beyond oil and gas
Since the discovery of oil over half a century ago, the sector has slowly sucked investment away from agricultural production, once the staff of Nigerian exports. Infrastructure crumbled and support for large-scale cocoa, groundnut and palm oil enterprises dried up under years of oil-fueled dictatorship. Even on the Niger Delta – where fishermen once pulled in 600,000 to 700,000 tonnes of fish each year – most people now eat frozen imported fish.

“Nigerian production capacity in these areas has continuously been on the decline as the sector had been neglected by government and the general public,” says Okechkwu Ihejerika, who manages trade finance for PHB Bank.

With the advent of democracy, though, President Yar’Adua, like his predecessor, has sought to strengthen agriculture, a sector where 70% of the workforce is employed, as an antidote to the volatility of oil markets.

Policies are now focusing on making loans accessible to farmers. Through its Agricultural Credit Guarantee Scheme, the government has so far guaranteed N3.8bn (US$23.8mn) in loans made to farmers by local banks. Much of the interest on those loans will be refunded once repayment is complete. To raise funds, banks contribute 10% of their annual profit after tax to the scheme. “This has tremendously boosted agriculture,” remarks Ihejerika. A biofuels plant, intended to process sorghum is also under construction.

The country has even wooed white farmers booted out of Zimbabwe under Robert Mugabe’s notorious land reform programme with plots of fertile land and a host of incentives in the hope that they will spread their expertise in commercial agriculture through Nigeria.

While it looks as though Nigeria will remain a net importer of agricultural goods in the short term, banks are paying attention.

“Nigeria, in terms of structured finance for the agricultural sector, is lagging behind Ghana and to some extent Cote d’Ivoire in terms of banks packaging pre-export finance facilities,” comments David Colgan, director, business development at Zenith Bank (UK). “With the government strategy to increase agricultural production in areas such as cocoa, there will undoubtedly be more activity from indigenous and international banks in supporting export finance.”

And it isn’t just agriculture and gas that have been overlooked here. “There is underinvestment in every sector we can think of,” says Sisay of Exclusive Analysis.

“Nigeria’s infrastructure is far less than a country of its size and economic ambitions can think of. In terms of the extractive industry, there are significant amounts of minerals.”

It’s estimated that Nigeria’s mineral wealth – which includes gold, bitumen, limestone, barite, lead and zinc – could contribute the equivalent of 80% of the existing GDP.  There are thought to be 2.8mn tons of coal reserves.

Oil imports
In spite of its global prominence as an oil exporter, Nigeria still lacks the capacity to refine sufficient oil for domestic use. Instead, the country spends as much as US$7bn each year importing refined oil.

Those deals, which are funded by both local and global banks, aren’t bound to change in the next five years or so.

Prices on these deals are “even declining right now,” remarks one Nigerian banker.

In the long term though, there are plans to reduce dependency on foreign refineries, a change transnational energy companies will be expected to contribute to.

“Future energy contracts are likely to have some aspect of local refinery requirement,” Sisay says.

“Companies that don’t build refineries locally will be likely to lose concessions.”

Local banks thrive after consolidation
The central bank’s introduction of a radical increase in minimum capital requirements for Nigerian banks, from N2bn to N25bn, has boosted the confidence of international lenders, helping to ensure the flow of trade finance from overseas in spite of a credit strapped global environment.

“Despite very difficult conditions in the wholesale markets, you are still seeing the availability of import finance for Nigerian banks,” says Intercontinental’s Hopkins. “Letters of credit continue to be issued and refinanced… and the rates of interest which are charged on refinance are still attractive and indicative of the track records and relatively low risk of those transactions.”

International banks lending money to Nigerian banks are mainly dedicated to international trade, whether they are financing the importer, directly paying an exporter or channeling money through Nigerian banks.

Some banks have raised money by issuing Eurobonds and GDRs in the London stock exchange. Others have signed bilateral agreements with multilaterals like the IFC and the African Development Bank. SMBC has tapped into appetite for Nigerian trade finance by raising money through select groups of investors familiar with the West African country’s economy.

“We know investors who have insight on Nigerian banking risk so we call them and we ask them to join our deal,” explains Christian Karam, head of the Africa desk at SMBC Group.

“We end up with five to 10 banks or institutions funding the Nigerian banks. In today’s market it’s a nice structure because you can still have investors with appetite under such a channelled purpose.”

Since almost all of Nigeria’s banks are now involved in international trade, the global crisis of liquidity has driven prices up.

“Pricing is not directly related to Nigeria but it happens that Nigeria has a very strong need of trade loans because 99% of their hard-currency export is related to trade,” remarks Karam.

Demand for financing in Nigeria is considerable. In five years external exchange reserves have climbed from negative US$30bn to US$60.1bn. The country has stepped up institutional investment programmes calling for vast amounts of imports. The recent spike in commodities prices only escalated the volume of growth.

But with scarce credit conditions around the world, is there still appetite for Nigerian bank risk?

“In current market conditions, with a number of global banks cutting back, there is increased pressure on line availability or there’s limited availability,” comments Zenith’s Colgan.

The sheer volume of trade deals in combination with lengthening terms of refinancings have somewhat saturated the appetite for Nigerian bank risk. Earlier this year, terms of refinancings had stretched from 30 or 60 days to 180 days, clogging credit lines.

Though those terms have since returned to base levels, there is still a tremendous volume of Nigerian bank LCs on the market, spurring the creation of a secondary market.

“Many of the institutions that hold this refinance are looking to free some liquidity,” explains Karam of SMBC. “They might sell at a discount which will make the whole pricing at 4-5%.”

But this is not necessarily a bad thing: “This secondary market is pushing the business up, but it’s also increasing the capacity of the Nigerian banks. It’s a win-win situation.”