Nigeria: Investing in the future

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Nigeria’s new Sovereign Wealth Fund (SWF), to be established with an initial $1bn in investment, should significantly improve the country’s management of its crude oil earnings. The launch of the new fund, announced recently by the minister of finance, should also provide greater economic stability, improve national infrastructure and boost investor confidence.

The SWF will allow the government to more effectively save and invest the oil revenue it earns through the export of some 2m barrels of oil per day. The fund is intended to eventually replace Nigeria’s Excess Crude Account (ECA), established in 2003 to receive surplus revenue from crude oil sales.

The challenge in maximising profits via the ECA is that its funds have tended to fluctuate significantly in recent years. The account held some $20bn when late President Umaru Musa Yar’Adua took office in 2007 but had fallen to less than $1bn in late 2010, partially due to increased spending in the lead-up to the April 2011 presidential elections. The structure of the new SWF is designed to ensure it cannot be regularly tapped to cover government operating costs.

The fund is also designed to meet Nigeria’s most urgent needs. The new Nigeria Sovereign Investment Authority (NSIA) will be divided among three funds, each of which will constitute at least 20% of the total and reflect strategic investment goals. The Future Generations Fund will create a protected savings fund for the future; the Nigeria Infrastructure Fund will finance necessary infrastructure projects to support economic growth; and the Stabilisation Fund will act as a cushion against shocks related to changes in global commodity prices. The country relies on crude oil revenue for approximately 95% of its foreign currency earnings, and therefore remains sensitive to global price volatility until the economy becomes more diversified.

The SWF will get its start with $1bn to be taken from the ECA, whose bottom line has improved in recent months. The government set the 2011 budget with a projected price of $75 per barrel of crude, which turned out to be very conservative. As of October, Brent crude was trading at $110 per barrel. These unplanned profits allowed the ECA to grow from just $300m in late 2010 to $7bn by April 2011. However, despite the high oil prices, the ECA’s balance dipped to $6bn by October and will drop to $5bn when the SWF’s start-up funds are removed.

To aid the SWF’s establishment, the global auditing and consulting firm KPMG has been selected to manage the fund’s start up and has begun recruiting board members. The company is expected to send a list of proposed board members for presidential approval by mid-December.

The establishment of the SWF has not been particularly smooth. President Goodluck Jonathan originally signed the NSIA Act into law in May 2011, but political quarrelling delayed implementation for months. The governors of Nigeria’s 36 states, many of whom fear an SWF will result in less oil revenue available for state spending, have repeatedly opposed the SWF.

Discussions with the Governors Forum are ongoing, according to finance minister Ngozi Okonjo-Iweala, and she has said that no more money will go into the SWF until after additional talks with state officials. Protracted discussions, therefore, may continue to be an obstacle to the full commitment of oil sector profits to the fund.

Despite these delays, however, the fund’s creation comes at a time of renewed optimism for Nigeria’s financial standing. On October 21, Fitch Ratings revised Nigeria’s credit rating outlook to “stable”, or “BB-“. This is a strong improvement over the country’s previous downgrading to “negative” in late 2010 following three consecutive quarters of rapidly declining foreign reserves.

Fitch cited potential for positive economic reform along with greater fiscal discipline and the appointment of a new ministerial cabinet following nationwide elections in April as the credit upgrade’s rationale. Veronica Kalema, a director in Fitch’s sovereign group, said the improved outlook “anticipates a tighter budget for 2012, including progress toward...making the Nigeria Sovereign Investment Authority...operational.”

Okonjo-Iweala has indicated that one of the ministry’s priorities will be making the investments needed to diversify Nigeria’s economy. Many analysts saw President Jonathan’s appointment of Okonjo-Iweala as a promising sign for the economy, indicating a commitment to tackle Nigeria’s chronic economic and financial problems.

The SWF’s creation, by extension, seems to signal an increase in prioritising investor confidence and maintaining long-term economic stability, both of which are crucial to supporting growth and diversification.

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