A partial withdrawal of Nigeria’s oil subsidies, combined with an increase in Islamic terrorism, could destabilise the country and undermine its potential for inward investment, specialist insurance broker and risk consultant JLT Specialty Limited concluded in its latest report in February. Attacks that left 200 dead in Kano coupled with civil strikes due to the removal of oil subsidies in January 2012 led JLT to raise Nigeria’s risk ratings in its Country Risk Report.

“The attempt by [president] Goodluck Jonathan to remove the oil subsidy in one go showed that he had not read the political system very well, and that revealed a certain naivety on his part,” says Elizabeth Stephens, head of credit and political risk analysis at JLT. “As a result the unions in Nigeria took their workers out on strike, and you also had the popular protests that were not controlled by the unions. [This] cost him a tremendous amount of political capital. That causes concern among foreign investors because they wanted him to win the elections last year as they thought he had managed the economy well in the transitional phase. However, the nation-wide strike that cost billions of dollars undermines investor confidence.”

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Against the backdrop of an already weak financial infrastructure and an increasing threat of Islamic insurgency, the report warns investors to remain particularly cautious of what JLT perceives as “a fragile economy”. The rise of the radical Islamist movement Boko Haram, which has attacked several politicians, rival clerics and public institutions with increasing violence since 2009, poses concerns. The report also highlights that foreign exchange reserves in Nigeria have fallen from $66bn in 2008 to $33bn in 2012, windfall oil reserves have been depleted and inflation outstrips growth. With more than 70% of the budget absorbed by the cost of running the government, leaving little for the development of Nigeria’s inadequate infrastructure, the report warns investors that this could leave the country highly vulnerable to oil price shocks.

“I would not be very optimistic about Nigeria because at the moment we are likely to see more terrorist attacks, which will affect the north and move down to the south,” says Ms Stephens. “As a foreign investor, when considering where to invest, and where will you have stability and long-term growth, a country that is beset by terrorist attacks is not going to be your first choice.”

Mixed signals

Nevertheless it appears that Nigeria still remains an important FDI destination in sub-Saharan Africa, and in 2011 it achieved its best performance yet in attracting investments. Figures from greenfield investment monitor fDi Markets show that 2011 was the country's best year for attracting FDI since it started recording such data in 2003. In 2011, Nigeria attracted 50 projects worth $4.4bn. The leading sector in the country since 2003 is coal, oil and natural gas, which has accounted for 18% of projects. Furthermore investor signals identified by fDi Markets that found three projects are expected to commence 2012, which appears to portray a more optimistic picture than that in JLT’s report.

“On the fuel subsidy, my conclusion is, below the line, I see this as a positive story,” says Christian Esters, a senior credit analyst for Nigeria at Standard & Poor's. “The fact that the government stepped back from removing the fuel subsidy completely has not undermined its credibility. This partial removal has freed up a huge amount of fiscal revenues and it has taken a significant burden off the government’s budget.”

In fact Standard & Poor’s upheld its positive B+ grade of Nigeria’s sovereign credit rating, citing the current government’s reforms that include the partial removal of the fuel subsidy, a continued revision of the Petroleum Industry Bill, and the establishment of a sovereign wealth fund in 2011, as factors that will lead to a real GDP growth of 6.4% this year.

“If Boko Haram’s violence spreads around the country, there is a risk that foreign investors could be deterred from investing into Nigeria,” says Mr Esters. “However, there are other issues that are probably more significant. Boko Haram has traditionally been more active in the northern Muslim part of the country, [which] is the economically less important part of Nigeria. For investors, the most important FDI for Nigeria is in the oil sector. Thus this will probably not be the issue that is of the most important concern for investors in the [southern] oil region.” fDi Markets’ findings confirm this, as it found that between 2003 and 2011, of the top 10 companies that accounted for 15% of all FDI projects in Nigeria, the top three were oil giants; namely Chevron Corporation, Total and Exxon Mobil.

Localised risks

The crucial determinant appears to be location, as the focus of FDI is in the south of Nigeria. fDi Markets reveals a bulk of FDI projects between 2003 and 2011 were invested in the south, and Lagos, as the leading destination, attracted 105 inward investment projects from 96 companies, representing 34.2% of all projects in the country.

“With regards to the partial removal of the oil subsidy, foreign direct investors’ perception on Nigeria as an investment destination is positive,” says Christopher Hartland-Peel, managing director of Hartland-Peel Africa Equity Research. “With regards to Islamic terrorism, their perception is negative. However the Islamic terrorism is mainly in the Muslim north, and it has not to date affected the Christian south. However, if it were to affect it, for example if there were similar bombings in Lagos like there were in Kano, that would be serious.”

Nigeria remains a crucial investment destination in sub-Saharan Africa and instability from Islamic terrorism poses significant challenges. “Instability in Nigeria will lead to greater instability in, for example, Benin and Niger,” says Ms Stephens. “Due to what happened in Libya, you see a flow of weapons into Mali, and guns are in plentiful supply. There has always been a lot of crime and violence in Nigeria but that is now being exacerbated. There are very porous borders between the countries, so if Nigeria becomes more unstable, then within that region, there will not be a strong and stable government.” With a population of 140 million people, Nigeria remains one of the largest markets in west Africa, and further instability could have significant knock-on effects on FDI into west Africa as a whole.

Nonetheless, when looking at Nigeria’s prospects, Mr Elsters maintains that while January’s events may make investors cautious about the country’s market, Nigeria still appears set on the right path for growth. “The strikes have weighed on [Standard & Poor’s] expectations and that is why we see a slight economic decline of 6.4% this year from Nigeria’s growth of 6.8% in 2011. While there is some uncertainty related to the violence, I would not see this as significant. The economy is moderately more diversified now than it was five years ago, and GDP growth is spread more evenly,” he says.