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DealMakers AFRICA 2020 Annual

Nigeria: still a key investment economy despite challenges

by Ziyanda Ntshona, Katlego Lebea, Ayodeji Oyetunde and Abisola Akinyemi

Nigeria’s economic growth was hit by the COVID-19 pandemic and declining oil price, but government is enacting investor-friendly legislation, and Nigerian companies are playing a more active role on the African continent.

The effects of the COVID-19 pandemic on world economies cannot be overstated.  These effects are visible in the closure of many businesses, and the rapid increase in unemployment and poverty. A year ago, most economies in Africa were already experiencing declining growth rates, but since the World Health Organisation declared COVID-19 to be a worldwide pandemic on 11 March 2020, Africa’s growth has declined further.

Nigeria, the largest economy on the African continent, has, like many other countries, experienced the negative consequences of the COVID-19 pandemic and hard lockdown. 


Negative effects of COVID-19
By 8 February 2021, there were at least 139,748 confirmed cases of COVID-19, and at least 1,667 COVID-19 related deaths in Nigeria and, by contrast, South Africa (the second largest economy in Africa, after Nigeria) had at least 1 477 511 confirmed cases and at least 46 473 COVID-19 related deaths as at the same date. Many Micro, Small and Medium Enterprises (MSMEs), which account for more than 80% of the total employment in Nigeria, had to either shut down or reduce their operations during the lockdown restrictions, which contributed to rising unemployment. Border restrictions resulted in lower volumes of exports, supply chain disruptions and increased prices for imported goods. Nigeria's inflation rate rose to 15.75% in December 2020, its highest level since the 15.13% recorded in January 2018, while food inflation rose to 19.56% in December 2020, compared to 14.67% in December 2019.

The government's revenues and foreign exchange earnings were negatively impacted by record low oil prices in 2020, as demand dwindled due to travel restrictions and limited economic activity. The oil and gas sector accounts for around 65% of the total revenue of the Nigerian government, and more than 80% of foreign exchange earnings.  

Other Significant Developments
The median age in Nigeria is 18.1 years and, with more than 60% of the population under the age of 24, it is no surprise that the #EndSARS protests, which garnered the support of many media personalities and public figures throughout the world, were led and championed by the youth in Nigeria. The youth were unequivocal in their condemnation of police brutality (specifically at the hands of the infamous Special Anti-Robbery Squad (SARS)). Shortly after the start of the #EndSARS protests in October 2020, the government announced the dissolution of the SARS unit and made commitments to implement reforms. Given the socio-economic realities of many Nigerians, it is clear that greater action is required.

Reforms to revive the economy
In the World Bank's 2020 Ease of Doing Business rankings, Nigeria was ranked 131 overall, out of 190 countries. The Nigerian government has sought to address this situation with President Muhammadu Buhari’s signing into law by of the Finance Act, 2020 on 31 December 2020, the Finance Act, 2019 on 13 January 2020, and the Companies and Allied Matters Act, 2020 (CAMA) on 7 August 2020, which we anticipate will result in an improvement in the country’s ease of doing business. 

The Finance Act, 2019 introduced an exemption for small companies (companies with annual gross turnover of approximately US$65,000 or less) from the payment of companies’ income tax, among other innovations; and seeks to reform Nigeria's tax laws to align them with global best practices, support MSMEs in line with Nigeria's Ease of Doing Business Reforms, incentivise investments in infrastructure and capital markets and raise government revenues. In the same vein, the Finance Act, 2020 introduces business-friendly tax provisions, especially for the benefit of small and medium companies as defined under the Act. Similarly, the CAMA is also aimed at reforming and improving Nigeria's business environment. 

Some of the notable innovations introduced by the CAMA include: 

  • introducing electronic filing for incorporation forms and electronic payment of stamp duties;

  • reducing the minimum number of people (shareholders) required to incorporate a private company from two to one; 

  • small companies, or those with a single shareholder, are no longer required to hold an annual general meeting, and meetings may be held outside Nigeria;

  • general meetings of a private company may be held electronically, provided that they are conducted in accordance with the company’s articles; and

  • directors are now required to have regard for the impact of the company's operations on the environment in the community where it carries out its business operations.

Furthermore, merger review regulations and ancillary documents were recently issued by the Federal Competition and Consumer Protection Commission, Nigeria’s primary regulator for merger control. It is expected that the issuance of the new regulations will improve the overall process for the review of M&A transactions in Nigeria.

Opportunities for investors in Nigeria
While the world tries to navigate the "new normal", opportunities still exist for investors in Nigeria, despite the current economic conditions. With the resumption of economic activity, it is likely that volatile sectors such as Oil and Gas will see improvements in exports.

We anticipate opportunities to use technology in all sectors, including agrotech, agro processing, edutech and fintech. Sectors involving non-discretionary spending, such as consumer goods (including food retail) and financial services, will see growth in e-commerce and online shopping, with the likes of Ecobank launching an e-commerce solution in December 2020, aimed at providing a platform for MSMEs to access the online market. The knock-on effects of an improved food retail sector include an active agricultural sector (where most MSMEs operate), better food security and reduced food prices. Some commentators have noted that the agriculture sector offers the potential to bail Nigeria out of its perennial foreign exchange crisis, if the value chains are developed to enhance its export value. 

The Nigerian equity market has experienced growth in recent times. Trading on the Nigerian Stock Exchange recorded a gain of ₦2.75 trillion between September and October 2020, with high demand for undervalued stocks. This development has been attributed largely to the lower yields on fixed income instruments, and excess liquidity caused by dwindling investments in the fixed income and debt market. Companies looking to raise finance through equity transactions on the Nigerian Stock Market can take advantage of current market conditions and innovations by the Nigerian Stock Exchange, aimed at assisting MSME businesses to raise capital. The biggest gainers include banking and consumer goods sectors, while standout performers include Dangote Cement and MTN Nigeria, both of which hit the ₦3 trillion market cap mark recently, echoing activity in the sectors noted above.

On the M&A front, there has been increased activity. Some of the notable transactions include the acquisition of a 45% participating interest in Nigerian oil licence OML 17 by Heirs Holdings and Transcorp; the acquisition of Paystack, a Nigeria-based payments services provider, by American firm Stripe for US$200 million; the acquisition of Peugeot Automobile Nigeria (a JV between French automaker Peugeot and the Nigerian government) by Nesbitt Investment Nigeria; and the merger of Chemical and Allied Products PLC with Portland Paints and Products Nigeria PLC. In terms of outbound transactions, although Dangote Cement announced that it has delayed plans to list shares on the London Stock Exchange, Access Bank recently announced that it has entered into definitive agreements for acquisitions in Mozambique and South Africa. 

Reaching out to the rest of the continent
We believe that Nigeria is gaining broad attention from a South African, regional and international perspective. Nigerian entities are trying to establish a greater pan-African presence, with increased outbound activity. Access Bank is the most active corporation, with recent acquisitions in South Africa, Mozambique, Zambia and Kenya. In addition, there is an increased interest in data centres across the continent, particularly in Nigeria. The Econet Group founder and newly appointed Netflix board member, Strive Masiyiwa, recently announced the commencement of construction on a US$100 million data centre in Lagos, Nigeria, which is expected to be the largest data centre on the continent, outside of South Africa. As outlined above, we continue to see activity in both the fintech and consumer sectors.

Although Nigeria is currently facing some challenges (including security, high inflation rates, exchange rate crises and national electricity outages), its position as the largest economy in Africa gives it leverage, and it should not be ignored by investors. Local investors have been bullish in their outlook for Nigeria - the Dangote Group is presently building one of the largest oil refinery and petrochemical complexes. Other leading investors, including BUA group, have announced significant projects in the Oil and Gas, and power sectors. With the advent of the African Continental Free Trade Area, we are likely to see increased interest in Nigeria from international investors. 

Ntshona is a Partner and Lebea a Senior Associate with Webber Wentzel. Contributions by Oyetunde, a Partner and Akinyemi, an Associate with Aluko & Oyebode.

Webber Wentzel and Aluko & Oyebode signed a bilateral agreement in December 2018 to deepen and formalise their relationship and create a stronger platform to serve clients operating in Africa. Webber Wentzel is the leading full-service law firm on the African continent and Aluko & Oyebode is the largest full-service law firm in Nigeria. 

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