The emerging markets acted as the lifeline to the global economy post the 2008 crisis. In times of negative GDP growth and a sharp drop in consumption in the developed economies, the emerging ones managed to cushion the overall impact. But if one assumes that nothing could go wrong with the heroes of economic recovery, the risks of being proven wrong are unfortunately terribly high.
So, what are the tell tale signs of overheating economies? They feature as headlines in the dailies almost every day and are not strange to our hearing. Inflation, GDP growth, interest rates, employment rates, consumer price index, poverty levels, income inequality, production slowdown and current account deficit are a few of the important indicators. On most of these accounts, Nigeria would appear to fare better off on the face of it.
According to a recent article by The Economist on emerging markets, each economy was ranked based on six different indicators. They include; inflation rate, unemployment rate relative to its ten-year average, GDP growth relative to trend, excess credit, interest rates and the forecast change in the current-account balance in 2011.
There are seven hot spots where a majority of the indicators are flashing red: Argentina, Brazil, Hong Kong, India, Indonesia, Turkey and Vietnam. In particular, the growth in credit is sizzling in all seven. Argentina is the only economy where all six indicators are on red, but Brazil and India are not far behind.
In a related report by Reuters – “the risks of operating in Nigeria, Africa's second biggest economy and top oil producer, are huge, but so are the rewards, say people who do business there”.
"We know it's not risk free," says Charles Robertson, global Chief Economist at Renaissance Capital. "But look around the world and find another economy with 160 million people growing at 7 percent with such potential. It's a struggle to find them."
"Nigeria is the best kept secret in the world. Anybody who doesn't invest in Nigeria only has himself to blame, going forward, if he misses out," says industrialist Aliko Dangote
However, violence and political instability in Nigeria still slice millions of dollars off the profit margin of some firms, PZ Cussons is good example. The household products firms announced two profit warnings in the first quarter of this year, blaming a hit to sales from social unrest in Nigeria, its biggest market, where it makes one third of its revenue.
Also, analysts and financial experts have continued to question this growth rate ascribed to the country in the light of gripping poverty and unrelenting corruption. According to Bisi Onasanya, Group Managing Director of Nigeria’s oldest and largest bank, First Bank Plc “Part of the difficulty with attracting investments into the economy is the diverse risks for which would-be investors require a premium on expected returns. The proximate risk in this regard is inflation. Despite the best efforts of the monetary authorities, this has remained in the lower double digit range for some time now. Adjusted for changes in the movement of domestic prices (and with inflation averaging 11% in the ten years to end 2011) the 6.00% average growth rate in GDP turns out to be negative and not as attractive as it appears at first”.
Further, continued insurgency in the north and a growing dislocation of business and social activities in the region is clearly having a detrimental impact on FMCG businesses such as PZ and UACN which has distribution hubs there.
Be that as it may however, in the longer term, both firms are betting Nigeria's big population will turn into a massive consumer market as the demographic dividend remains unmatched.
Available economic data reveals that Nigerian economy is growing but requires diversifications as most of the growth took place in the non-oil sectors of the economy. The partial removal of subsidy on Premium Motor Spirit (PMS) affected the increase in inflation figure in early 2012 with the figure still hovering with the same range. The regulatory step of CBN has helped curtail the level of inflation in the economy while the country’s current account looks good with about US$8140 million in the coffer as at Q2 2011.
The non-feature of Nigeria in this report by The Economist may suggest that there are real concerns over the ability of the GON and its fiscal and monetary authorities to take actions needed to address some fundamental dislocations as highlighted above. For one, there exist concerns as to whether the domestic authorities can support the domestic currency in its current exchange band. In part, this is the result of falling oil prices on the global markets. Since the beginning of June this year, the naira has trended southwards making currency volatility along this lines further complicate the economy’s ability to attract investment, as would-be investors worry that adverse currency movements might see them incur losses on their investments, whenever they decide to repatriate such.
Nigeria may thus have to get off the high horse it is riding, and take specific and deliberate actions that balances local needs with increasing its attractiveness to foreign investors. It surely has its work cut out for it.