Factors Affecting Foreign Investments in Nigeria

Africa is often regarded as one of the world’s last untapped investment frontiers. As a continent, Africa is blessed with abundant natural resources ranging from industrial and precious metals to vast reserves of crude oil and natural gas. The continent is also rife with corruption, geopolitical tensions and violence. For better or worse, all of those traits apply to Nigeria, so investors need to be careful with this African nation.

Junk Credit Rating

Foreign investors looking for exposure to Nigerian bonds need to consider the country’s credit rating. Credit ratings are fluid and can change from year to year, meaning the BB- Nigeria had from Standard & Poor’s in late 2012 could change in the future. That rating is a non-investment grade or "junk" rating, and Nigeria’s sovereign debt has carried a junk rating for decades. That means the country has higher borrowing costs than a nation with an investment-grade rating. The upside for foreign investors is that junk bonds carry higher yields to compensate investors for the perceived increase in risk.

Oil

Nigeria is a member of the Organization of Petroleum Exporting Countries, or OPEC, and has, over the course of its oil-producing history, vied with fellow OPEC member Angola for the title of top African oil producer. The cautionary tale for foreign investors is that oil production has accounted for a disproportionate share of Nigeria’s gross domestic product over the years, implying the country is not economically diverse. Government spending in Nigeria is intimately correlated to oil production and prices. That is good when oil prices are soaring, but Nigeria faces economic challenges when crude tumbles. Nearly all of Nigeria’s trade partners only want oil and gas from the country, and the energy industry is the primary destination of foreign direct investment in the country.

Poor Infrastructure

Although Nigeria has an abundance of oil wealth, that wealth is concentrated in the hands of a few government power brokers and wealthy businessmen. As a result, the government has not invested appropriately in infrastructure. Nigeria has inadequate roads, highways and railroads for basic functions of commerce. Additionally, the country’s power grid is viewed as decrepit, making factory operations there difficult.

Violence

Potential investors in Nigeria cannot overlook the country’s inconsistent government policies, which have contributed to the nation’s reputation as a violent place. Rebel militias have kidnapped innocent civilians and attacked oil assets, such as rigs and pipelines. Western companies that do business in Nigeria know that spending on security to protect staff and assets is necessary, but it's also a drain on profits. Political instability in Nigeria is heightened by other factors beyond violence in the oil-rich Niger Delta. Accusations of voter fraud were rampant after the 2007 Nigerian elections, and the religious divide between Christians and Muslims also contributes to the country's political instability.

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About the Author

Todd Shriber is a financial writer who started covering financial markets in 2000. He worked for three years with Bloomberg News and specializes in analysis of stocks, sectors and exchange-traded funds. Shriber has a Bachelor of Science in broadcast journalism from Texas Christian University.

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