For the fourth consecutive year, the equities market posted a positive return on investments last year and emerged as one of the best-performing across the globe. But Steve Osho, the co-founder of Comercio Partners Limited, an investment bank, in an interview with GEOFF IYATSE, says bigger opportunities are yet ahead for the market.
What is your assessment of the economy, especially as it relates to key macroeconomic performance indicators?
Last year witnessed a deceleration in Nigeria’s gross domestic product (GDP) growth, dropping to 2.6 per cent from the 3.3 per cent recorded in 2022. The slowdown is a result of various factors, including the services sector’s poor performance and fluctuations in oil production. The services sector, a major contributor to GDP, has been a key driver of economic activities, while the rebound in oil production has moderated, as seen in the ongoing challenges in the oil and gas sector.
Inflationary pressures significantly shaped the economic landscape in 2023. The average year-on-year inflation rate surged to 25.5 per cent in the third quarter, marking a substantial increase from the 20.3 per cent recorded in the same period in 2022. Recent data shows that the inflation rate increased to 28.2 per cent in November 2023, up 0.87 percentage points from October’s 27.33 per cent.
The food index is a significant contributor to the overall inflation. This surge in headline inflation is attributed to the removal of fuel subsidies and the depreciation of the naira. The impact of these factors has been profound, affecting consumer purchasing power and overall economic stability.
The issue of exchange rate volatility and foreign exchange (FX) reserves was a central concern in 2023. Despite efforts to liberalise the exchange rate, a persistent gap has emerged between the official and parallel exchange rates, with a premium of over 30 per cent observed over the official rate. The Central Bank of Nigeria’s (CBN) net FX reserves declined substantially, indicating potential challenges in managing external liquidity.
FX shortage has continued to pose challenges to economic activities, hindering foreign capital inflows. While the CBN lifted the ban on FX for certain imports, the gap between official and parallel exchange rates widened, reflecting uncertainties in the FX market. The challenges in achieving a more liberalised and stable FX market have implications for investor confidence and capital flow.
The recovery in oil production, albeit partial, has influenced the economic landscape. The sector recorded an increase – up to 1.57 million barrels per day (mbpd) in September 2023 from a low of 1.25 mbpd in September 2022. However, the production remained below the pre-pandemic level of 2.09 mbpd in 2019. The budgetary impact of oil production dynamics, coupled with efforts to narrow the budget deficit, is critical for overall economic stability.
Fiscal policy measures, including the removal of fuel subsidies, aimed to address budgetary challenges, were taken. Fitch forecasts a narrowing of the budget deficit to 5.2 per cent of GDP in 2023, with an anticipated further reduction to 4.6 per cent in 2025. However, the overall structure of public finances and the reliance on oil revenue continue to be a concern.
This year, the Comercio Research Team projects a GDP growth rate of 3.5 per cent, which will be primarily driven by the services sector and improved oil production. Inflation is expected to moderate to 24 per cent in 2024, though still significantly above the international average. The macroeconomic projections highlight the delicate balance between fostering economic growth and managing inflationary pressures.
The economic landscape of Nigeria in 2023 reflected a nuanced mix of challenges and opportunities. The interplay of factors such as inflation, exchange rate dynamics, oil production, fiscal policies and monetary measures underscore the complexity of steering the economy towards sustainable and inclusive growth. Policymakers, investors and market participants need to closely monitor these dynamics and adapt strategies accordingly to navigate the uncertainties in the Nigerian economic landscape.
Would you describe 2023 as a good year for the investment community?
The assessment leans towards consideration of the year as a challenging one for Nigeria’s investment community. While initial reform measures were promising, the persistence of FX challenges, uncertainties in the oil sector, high inflation and governance issues create headwinds for investors.
Backtracking on key reforms and the widening gap between official and parallel exchange rates contribute to an environment of uncertainty. Investors’ value stability and predictability as well as any inconsistencies in economic policies could result in a cautious approach.
The nuanced macroeconomic landscape emphasizes the need for vigilance and adaptability. Investors must closely monitor policy developments, navigate FX challenges and price in broader economic conditions when making investment decisions.
In summary, while certain positive measures were taken in 2023, the overall investment climate is marked by challenges that necessitate a vigilant and adaptive approach from investors in Nigeria.
A major driver of historic inflation concern is persistent naira depreciation. Do you see this trend continuing into this?
While predicting currency movements is inherently uncertain, the persistent naira depreciation observed in 2023 is likely to remain a concern in 2024 if the structural issues in the FX market, reliance on oil revenues and policy inconsistencies persist. The outlook will be influenced by a combination of domestic reforms, global economic conditions, oil market dynamics and the effectiveness of monetary policy. Investors and stakeholders should closely monitor these factors to assess the evolving landscape and make informed decisions based on the prevailing economic conditions. Nigeria’s economy offers several opportunities for investors this year.
What are those opportunities for investors and what strategies should they adopt to leverage the opportunities?
Despite the challenges and uncertainties highlighted in the economic landscape of Nigeria for 2024, there are several opportunities for investors. To capitalise on these opportunities, investors should consider adopting strategies that align with the prevailing economic conditions.
Here are key opportunities and recommended strategies. They should diversify investments beyond the oil sector and present an opportunity for stable returns. Sectors such as agriculture, technology and manufacturing have the potential for growth and resilience against oil price volatility.
Investors should conduct thorough sectoral analyses to identify promising industries. Targeting businesses with strong fundamentals, sustainable growth prospects and resilience to external shocks can be a strategic approach.
Nigeria has significant infrastructure needs, and government initiatives to address these gaps present opportunities for investors. Infrastructure projects, including transportation, energy and telecommunications could be lucrative.
Investors can explore partnerships with government entities, engage in public-private partnerships (PPPs) or invest in companies involved in infrastructure development. Due diligence on regulatory frameworks and project viability is crucial.
Furthermore, the global shift towards sustainable energy creates opportunities in the renewable energy sector. Nigeria’s potential for solar and wind energy projects positions it as an attractive market. Investors can explore opportunities in solar and wind energy projects, invest in renewable energy companies or consider partnerships with organisations involved in sustainable energy initiatives.
Also, the digital transformation wave is sweeping across industries and presents opportunities for technology and innovation investments. Electronic commerce, fintech and digital services are areas with substantial growth potential. Investors should identify tech startups, scale-ups or established companies leading in digital innovation. Strategic partnerships, venture capital investments or acquiring stakes in tech companies can be part of an investor’s strategy.
Urbanisation trends and a growing population create opportunities in real estate. Residential, commercial and mixed-use developments in strategic locations can yield attractive returns.
So, investors should conduct market analyses to identify areas with high demand for real estate. Strategic land acquisitions and partnerships with reputable developers or real estate investment trusts (REITs) can be considered.
There are also opportunities in the consumer goods sector. Despite economic challenges, consumer demand for essential goods and services remains resilient. Fast-moving consumer goods (FMCG), healthcare and education services are areas of potential growth.
Investing in well-established consumer brands, healthcare facilities or educational institutions can be strategic. Identifying companies with a focus on affordability and quality can align with consumer preferences.
Government bonds and fixed-income securities can provide stable returns, especially in times of economic uncertainty. They offer a relatively low-risk investment option. Investors can also consider allocating a portion of their portfolio to government bonds and fixed-income securities to balance risk and return. Regularly monitoring interest rate trends and adjusting portfolio allocations accordingly is essential.
While navigating the investment landscape in Nigeria in 2024 requires careful consideration of risks, adopting a diversified and strategic approach can position investors to leverage emerging opportunities. Thorough due diligence, focus on sustainable growth sectors and flexibility in adapting to changing market dynamics will be key to successful investment strategies in the Nigerian context.
Foreign investors need to collaborate with local partners. This is because collaborating with local partners can provide investors with insights into the Nigerian market, navigate regulatory complexities and build relationships critical for success.
Seeking partnerships with reputable local businesses or establishing joint ventures can enhance market entry strategies. Local partners bring valuable knowledge about the business landscape, regulatory nuances, and customer preferences.
As a major player in the financial market, what are your expectations?
In 2023, Comercio Partners experienced robust revenue growth, driven by strategic initiatives, diversified product offerings and effective client engagement. Our key performance indicators (KPIs) relate to revenue, total income, fees, commissions and net interest income.
Comercio Partners successfully expanded its market share in various financial segments. The achievement was attributed to the effective deployment of marketing strategies, innovative financial products, and an emphasis on customer satisfaction.
The company witnessed a substantial growth in assets under management (AUM), reflecting strong performance in investment management services. The increase in AUM is indicative of successful investment strategies, attracting new clients and retaining existing ones. We intend to sustain the growth momentum and consolidate our position as a market leader in the financial sector. The company will focus on expanding its market presence through targeted marketing strategies, product innovation and customer-centric approaches.
