deltalaine economics

Why Nigeria’s Credit Rating Matters More than Oil

How can something intangible (credit) matter more than a real resource (oil)?

I just finished a book that changed, or at least makes more dynamic, the way I view African development, Yuval Noah Harari’s Sapiens. Sometimes we get so ensnared in the details of social analysis that we forget to take a step back and look at the larger picture. Harari’s historical account helps us to do just that. His research deepens our understanding of the complexities of the resource course in oil-rich nations without strong democratic institutions.

He argues that one of the key turning points in human history was when we stopped viewing world resources and money as finite, and instead recognized that trust in imaginary future goods could create infinite economic expansion. These imaginary future goods were represented with a new kind of money: CREDIT.

Although we hear of the dark side of credit often—consumer credit card debt, credit on a loan to buy a home that the consumer could never pay off—credit is actually miraculous. As Harari phrases it, “credit enables us to build the present at the expense of the future.” In it, there is implicit hope that future resources will be more bountiful than current ones. That hope in the hypothetical is just so….human. And it has allowed the world’s per capita production to grow at a staggering rate over the last several centuries.

Although he doesn’t mention Nigeria specifically, a section of the book lucidly argues that a country’s credit rating, or the shared belief that a country will pay back its debts, matters more to its economic development than any other factor—including natural resource endowments.

Here is a grossly over simplified explanation using a feedback loop of why a nation’s healthy credit matters so much:

A) People have faith in the future economy —> B) credit is given out —> C) credit allows us to grow current businesses —> D) this growth is invested in new businesses —> E) businesses create goods that can be sold to pay back loans to creditors —> F) these pay backs fortify faith in the future economy.

And we are now back at the beginning of this cycle.

For those familiar with Nigeria’s economic history, any moment in this cycle can be, and has been, interrupted because of its unhealthy oil economy. In 2004, Nigeria required international debt relief after sovereign defaults on what it owed to the IMF. This was due to “heavy borrowing, rising interest rates, and inefficient trade” (see D). When the country suspended the national fuel subsidy in January 2012, no one wanted to expand their businesses that required gasoline, which is all of them since electricity is unreliable (see D). As I have mentioned in another post, oil can create a dangerous mono-economy in developing countries because it replaces the drive to produce anything aside from the oil itself (see E). Because so much of Nigeria’s economy is based on oil, its unstable pricing erodes the “faith in the future economy” that is the basis of credit extensions at all (see A).

Here is the excerpt of Sapiens that struck me as so pertinent to Nigeria:

A country’s credit rating is far more important to its economic well-being than are its natural resources. Credit ratings indicate the probability that a country will pay its debts. In addition to purely economic data, they take into account political, social and even cultural factors. An oil-rich country cursed with a despotic government, endemic warfare and a corrupt judicial system will usually receive a low credit rating. As a result, it is likely remain relatively poor since it will not be able to raise the necessary capital to make the most of its oil bounty.

Based on the description below, would you trust Nigeria to pay back money you gave it as a loan? Or as a business owner, would you trust its economy to grow, and give you returns on a new business you started with money you got from a creditor? Not many people would.

 

What is a country’s credit rating anyway?

In general, a credit rating is used by sovereign wealth funds, pension funds, and other investors to gauge the credit worthiness of a country—thus having a big impact on the country’s borrowing costs.

Standard & Poor’s credit rating for Nigeria stands at B with stable outlook. Moody’s credit rating for Nigeria was last set at B1 with stable outlook. Fitch’s credit rating for Nigeria was last reported at B+ with negative outlook. Overall, there are 11 ratings of stable, 9 rating of negative, and just rating of positive for Nigeria

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As an aside, anyone who witnessed the 2008 American economic meltdown based on home loans can appreciate that these credit ratings are hypothetical. All of those agencies above, those “experts,” failed to change their credit ratings, would could have helped alleviate the devastating U.S. housing crisis that negatively impacted every country in the world.

So, if Nigerian policy makers are to take Harari’s purely academic arguments to heart, they’ll stop writing checks they can’t cash and pay back creditors.

Trust matters.

deltalaine Democracy

What If You Held An African Summit And No Africans Could Come?

From NPR’s 

Photo illustration by David Malan

The African Global Economic and Development Summit took place at the University of Southern California from March 16th to 18th.

None of the approximately 60 invited guests from Africa were able to attend.

The problem was that none of the African delegates were able to get U.S. visas.

Humphrey Mutaasa from the mayor’s office in Kampala, Uganda, had organized a delegation of 11 business leaders from Uganda to attend the African Global Economic and Development Summit at the University of Southern California.

He says it was a very high level group of leaders from private businesses, the Ugandan ministry of trade, chambers of commerce and the Kampala mayor’s office.

“The delegation that was coming from Uganda to that summit was very, very disappointed,” he says.

The conference was first held in 2013 and seeks to strengthen business ties between U.S. investors and African companies, says summit chairwoman Mary Flowers.

Visa problems have been an issue before, she says. In the past, she says roughly 40 percent of African invitees are unable to get the papers they need to attend, mainly due to a combination of red tape and bureaucracy.

“This year we were thinking there are going to be some rejections but some will still come,” she says. “But it was 100 percent blocked across the board.”

It’s hard to find out exactly why.

Delegations were invited from 12 countries across the continent. None of them were from the three African nations (Libya, Somalia and Sudan) covered by President Trump’s executive order temporarily banning travel from 6 majority Muslim countries.

Flowers speculates new vetting procedures put in place by the Trump administration are discriminating against travelers from Africa.

“Obviously because this has never happened before,” she says of the inability of anyone to come.

The White House has called for “enhanced screening and vetting of applications for visas” worldwide as part of stepped up efforts to keep out terrorists.

A State Department official on background tells NPR that they can’t comment on any individual visa applications but says all applications are screened on a case-by-case basis. And the eligibility requirements for getting a visa haven’t changed.

Some of the African delegates to the summit say their visa applications were denied because they didn’t show a compelling reason why they would return home after the event. Others say bureaucratic hurdles were so big that they were not able to submit a visa application in the first place.

Humphrey Mutaasa in Kampala says the online application is complicated. You can’t even see how long the process will take until after you’ve paid a $160 application fee at a local bank. Then you have to wait a day to get a confirmation code to book an interview at the U.S. embassy.

“Then when you’ve finished that and you have the codes from the bank … there are the challenges of internet connectivity,” he says. “When you get online then the calendar [from the Embassy] will tell you the whole of February, there are no appointments, You can only secure an appointment after the 15th of March.”

Which meant he wouldn’t have a ruling on his visa until after the three day conference had concluded.

The end result of this year’s visa outcome, says Flowers, is going to be fewer connections between American business and the continent.

“I don’t know whether there’s some secret message going to the U.S. embassies in these African countries but it’s ridiculous,” she says. “The [visa] process was already somewhat discriminatory against the African nations in the past. We don’t know what the story is now but I do hope that America remains open to the world.”