Allianz places Nigeria on ‘sensitive’ immediate risk, ‘highest’, medium term 

• Investors advised to “tank up before you go”

PHILLIP ISAKPA IN LONDON, UK

Nigeria’s economic troubles, which have continued to be highlighted by international rating organisations and exposed to the global investor community, are still being picked up and put on display, a new report has shown.

The report by Allianz Trade, which measures the risk of non-payment by companies in a given country, has put Nigeria on ‘sensitive’ immediate risk level and ‘highest risk’ medium-term (country grade) level in its Country Risk Atlas, which it says provides comprehensive insights on the economic, political and business environment and sustainability factors that influence non-payment risk for companies in 84 economies.

The ‘sensitive’ immediate risk rating, and ‘highest risk’ rating for Nigeria come with what appears to be a warning advisory to investors and organisations looking to do business in Nigeria for which they would require to be paid, to “tank up before you go” in its assessment of the country. 

In its overall assessment of the Nigerian economy, the report was positive about Nigeria’s growth prospect, projecting an economic growth of three percent (3%) this year, marginally up from the 2.9 percent growth of 2023. An explanatory note sent to Business a.m. with the report noted that “this growth rate is broadly in line with the global average but falls approximately 1 percentage point below the forecast for the Sub-Saharan region.”

The report noted that while the economic cycle continues to favour second-tier commodity exporters due to geopolitical factors and production quotas imposed by top crude oil producers, Nigeria faces persistent fiscal pressures due to institutional weaknesses, social challenges, and output constraints.”

It stated that the Nigerian government is limited in its ability to respond to these pressures, adding that there is, therefore, a heightened risk of a negative feedback loop emerging in the coming years, driven by higher government borrowing needs and rising interest rates.

Working with an average inflation projection of 17 percent for the year, the report observed that the main growth contribution for Nigeria will come from the trade balance, which is expected to benefit from the partial replacement of refined petroleum imports by new domestic production and the simultaneous increase in value added. 

“Reduced predictability of government action that characterised the middle months of 2023 and led respondents to our Allianz Risk Barometer to view “Changes in legislation and regulation” and “Market developments” as more impactful than “Political risks and violence”, policy normalisation is likely this year although further rounds of naira devaluation cannot be ruled out,” Allianz Trade stated in the report.

Another factor highlighted by the report in its risk assessment of the country is Nigeria’s internal security challenges, which it identifies as hindering its contribution to regional military units, despite its prominent position in Africa, while national and supranational institutions across Western Africa are increasingly contested. 

The report warns that potential downgrades in 2024 could be triggered by liquidity constraints, below-potential growth, rising business insolvencies, changes in global supply chains, and increasingly polarised geopolitics during a packed election year.

The Allianz Trade Country Risk Atlas recognised the strengths of Nigeria and its economy, noting it as having the dominant economy in Africa in terms of population, GDP and crude oil production; a vibrant civil society accustomed to dealing with the cyclical nature of the economy; with vast mining potential, which investors are likely to be granted considerable incentives to develop the sector.

Notwithstanding these strengths, the country’s weaknesses identified by the report include terrorism, insurgency, kidnapping and violent crime, which it noted are major deterrents to business operations in many parts of the country due to poverty and deep ethnic, religious and subnational divisions.

Allianz also identified the country’s structural imbalances caused by a dependence on the import of refined petroleum products, poor infrastructure and generalised subsidies, noting that Nigeria’s long history of economic mismanagement and corruption continue to affect perceptions of doing business in the country.

In its economic review of Nigeria, it noted that economic growth remains below the country’s potential and that hydrocarbons generate about 50 percent of government revenues and more than 80 percent of exports, but that agriculture and services surpass the energy sector in terms of GDP contribution.

The report stated that Nigeria’s estimated three percent economic growth in 2024 is being made after a sluggish 2.4 percent expected for 2023, but that this is broadly in line with global growth but around one percent below Allianz forecast for the sub-Saharan region. 

It sees foreign exchange scarcity continuing in the immediate future, noting that the Central Bank of Nigeria (CBN) has returned to stronger currency supervision after briefly switching to a “managed float” in June 2023 and a freely traded naira is unlikely even in the long run. 

“General elections in February 2023 brought to power Bola Tinubu, the candidate of the ruling party, with a mere 37% of votes. Growing demographics (half of the current population is under the voting age) and declining interest (the actual voter turnout fell from 69% in 2003 to 27%, 7 points lower than in 2019) support the idea that only a small minority of the estimated 215-220 million population actively supports the current leadership. 

“Between late May and June, only a few weeks after he was sworn in, President Tinubu decided to remove the governor of the CBN, devalue the local currency to a level closer to its fair value and phase out the country’s costly fuel subsidies. Faced with the possibility of growing inflation and nationwide protests, a covert petrol subsidy was reintroduced. In the short term, it is likely that a partial subsidy will be maintained as Nigeria will continue to import all its fuel until the second half of 2024, when the long-awaited Dangote refinery, which opened in May 2023, ramps up production. Against this backdrop, it is likely that net exports will be the sole growth driver in 2024 and help the economy accelerate in 2025,” the report noted.

The report highlights Nigeria’s history of double-digit inflation noting that as a result of rising fuel, utility and food prices, average inflation reached 18.8 percent year over year in 2022, some 10 points above the CBN target of 6–9 percent, adding that with the surge in inflation, the CBN raised its policy rate to 18.75 percent, but the 725bps tightening cycle has proven unconvincing so far, with inflation hitting 28.2 percent in November 2023. 

“Given the country’s heavy reliance on imported refined petroleum products, international prices may continue to push the fuel import bill up and the local currency down,” the report warned.

It observed that fiscal pressures persist for Nigeria as a result of institutional weakness, social challenges and output constraints.

According to the report, the “government faces wide-ranging fiscal pressures, while the capacity to respond remains constrained by Nigeria’s long-standing institutional weakness and social challenges. The risk that a negative feedback loop sets in over the next couple of years due to a combination of higher government borrowing needs and rising interest rates has intensified. 

“However, the risk of a sudden sovereign default is low given the small amount of FX-denominated debt (about 42% as of June 2023) and the limited amount maturing in the next two years,” Allianz further stated. 

Production in the key oil sector remains weak due to security challenges, the report stated, noting, however, that despite being the 12th world producer of oil (first in Africa), Nigeria did not benefit from favourable oil and gas prices in 2022. 

It stated that oil production fell significantly due to persistent extraction constraints, observing that at 1.3–1.4 million barrels per day (mbd) in late 2023, output has remained well below the OPEC+ quota of 1.74mbd throughout the year and the organisation agreed to allocate 1.4mbd for 2024 unless the country is able to produce more. 

It warned that with Angola quitting OPEC+ in December 2023, it is likely that foreign investors may prioritise Angola’s upstream segment over other projects in the region.

On the risk posed by security, Allianz stated that the security crises continue to remain beyond the capability of the federal government, noting that Nigeria, because of its size, holds a prominent position in Africa.

“Despite this, the country follows a protectionist economic policy. Internal security challenges constrain Nigeria’s capacity to contribute personnel to regional military units, as previously done for regional security. The Senate rejected President Tinubu’s request for military intervention in Niger following the July 2023 coup, which lessens the likelihood of creating a regional force,” the report noted 

According to Allianz, in recent years, the northeast has grappled with escalating banditry and kidnapping, posing a national destabilisation threat, noting that well-funded criminals, with links to terrorist groups, have broadened their operations. 

“In the oil-rich Niger Delta, there is widespread distrust of the government, with locals feeling unfairly excluded from Nigeria’s oil wealth. Governance challenges persist in the region and criminal activities associated with militant groups continue to jeopardise oil extraction,” the report observed.

Although it observed that the broader regional threat posed by Islamist extremist organisations has seen the US become a major arms supplier to Nigeria and is likely to persist in providing security assistance, the persistent menace from Islamist terrorist groups, such as Boko Haram and Islamic State West Africa Province, operating in the north and executing attacks nationwide, remains a concern.

It also noted that prolonged violence between farmers and herders in central Nigeria, driven by factors like rapid population growth and natural resource depletion, presents challenging issues.

The Allianz Trade’s Country Risk Atlas, which is the first edition, assesses the economic, political and ESG factors influencing non-payment risk for companies in 84 economies. The Country Risk Atlas is based on a proprietary risk ratings model that is updated every quarter with the latest economic developments and Allianz Trade’s proprietary data on global insolvencies and the business environment.

“The Country Risk Atlas provides comprehensive analysis and insights into economic, political, business environment and sustainability factors that influence trends in non-payment risk for companies at a macroeconomic level. It aims to be a companion for businesses and investors in making informed decisions by identifying potential risks and opportunities in 84 different economies, along with the map we produce quarterly for all the 241 countries and territories we monitor,” states Ana Boata, head of economic research at Allianz Trade.