The Economics of Money, Banking, and Financial Markets - Nigeria - Essay Example

?Running head: COUNTRY/INDUSTRY RISK ANALYSIS Country/Industry Risk Analysis 6th November Introduction The current stiff competition faced by local firms has forced them to go global with an intention of maximizing their profits and widening their market share. To ensure the success of companies in other countries, it is vital to undertake risk analysis before establishing the venture. Risk analysis is a significant process that entails identifying and assessing aspects that may interfere with the progress of a company thus making it difficult to achieve the objectives set by the management. Taking into consideration the impact of political, social and economic factors on the establishment and growth of foreign ventures, it is paramount for company directors to ensure coverage of wide areas during the risk analysis process. One of the benefits of risk analysis is that it provides directors with adequate knowhow on goods and services to offer as well as choices of location. In addition, it helps company owners with policies that are vital for operations of a company. Similarly, risk analysis helps companies to be compliant with laws in foreign countries. This report analyzes economic risks, political risks, business environment risks and currency risks that we need to consider before our company embarks on establishing a joint venture in Nigeria. Economic risks One of the major factors that affect the growth of Nigeria economy is poor planning by the government. This has not only resulted to high level of unemployment but also a reduction of household’s income thus lowering the consumer’s purchasing power. For example, the revenue generated by the country’s extensive oil industry is not effectively managed thus increasing the poverty level in the country. In addition, the country has small arable land thus lowering the total food production. As a result, the country has reduced exports thus lowering the Gross Domestic Product (GDP). Another area that is negatively affected by poor government planning in Nigeria is infrastructure system. For instance, the country has poor road system making it difficult to assess rural areas as well as expanding business activities. It is worth to note that for any country to develop, competition is vital since it allows innovation and production of wide range of products in the market. However, a major obstacle affecting Nigeria economic prosperity is lack of genuine competition. As a result, market forces do not play a vital role to regulate the economy. In the same way, the country leaders are significantly engaged in controlling the economy an aspect that is contrary to the Adam Smith ideology of not allowing governments to interfere with economy (Dwivedi, 2001). Macroeconomic imbalances are another challenges facing Nigeria. For example, new ventures have the risk of facing unstable inflation and excessive borrowing by the government. Additionally, the government has failed to commit itself to address the macroeconomic challenges thus leading to larger deficit in the government budget. Political risks In order to establish a profitable business venture, it is imperative for investors to consider the political situation of the country they wish to invest. It is vital to note that even though a firm can have adequate finances to cater for its own internal security, political instability in a country can negatively affect the operations of a company resulting to its closure. This implies that as we focus on entering the Nigeria market, it is fundamental to analyze the political factors of the country thus identifying the obstacles or the benefits that our firm is likely to face. One of the major political aspects that are notable in Nigeria is the rivalry that exists between the North and Southern residents. This was catapulted by the policy that was applied by British government that included use of direct rule on the southern region and indirect rule in the Northern area. Not only has the rivalry between the two regions affected their social and political life, but also it has negatively affected the religious movements in the country. In the same way, the ethnicity that is experienced in the country negatively affects the economic development of the country by limiting the expansion of local firms. For instance, the Southern region of the country is divided into Yoruba-dominated area, eastern, western and the Igbo-centric sub regions (Egan, 1999). Due to high level of ethnicity among the Nigerians, politicians are identified by their ethnic groups. As a result of the ethnicity, favoritism and high level of corruption are evident in the hiring and recruitment process not only in government ministries but also in local companies. As a result of the unfairness in the sharing of natural resources and power, the Nigerian administration has regularly been faced with overthrow thus exposing new and existing business to risks. Another notable political aspect in Nigeria is the conflict that exists between legislature and executives arms of the government. The ruling party is divided into various factions thus making it hard to coordinate its activities at the national level. In the same way, the country legislature is not effective in passing laws despite its large number of members. Federal-state issue is also a major political factor that is affecting the economic development of the country. Due to the poor coordination of the federal and state governments, the amount of funds transferred from federal government to the states has been increasing thus increasing government expenditure. Frequent strikes by workers especially in the Niger Delta are also a major obstacle that is affecting the operations and the productivity of the companies located in that region. The high number of tollgates established by various communities is a key aspect that is increasing the costs of transporting raw materials from their sources to the manufacturing facilities. Major reason for the erection of the tollgates by the community is to recover the wealth that they feel the federal government has taken away from them. Business environment risks Nigeria has a poor business enabling environment. Key aspects that enhance operations of existing and new businesses include legal structure, financial system, transport utilities and communication. The country laws of protecting property rights are inadequate. In addition, company law and the process of issuing licenses to local and foreign firms are not sufficient. In this regard, new companies take longer time to stabilize their operations. In the same way, foreign companies with branches in Nigeria and local firms complain of poor government administrative services. For example, company registries maintained by the government are paper based thus retrieving company information is time consuming. As mentioned earlier, the country’s judicial system is inadequate. For example, the court system emulates delaying tactics in addition to poor accessibility to justice especially for individuals who have no connection with the judges. Another business risk that our new venture is likely to face is the expensive finance that is also provided by financial institutions under limited terms. As a result of the high interest rates by banks, the costs of credit offered to medium sized firms as well as large corporations is high implying that firms incur high costs of operations thus lowering the gross profits. The inability to deliver utilities by the government is also another obstacle that is affecting the operations of companies in Nigeria especially in terms of maintaining motivated employees. Despite the availability of microcredit programs in Nigeria, the number of microenterprises benefiting from them is few. In this way, such firms are limited in their expansion making them to be less competitive in the local and international markets. In the same way, there is poor management of local banks thus lowering the confidence of local and foreign investors. A possible business risk that our venture will face is due to the underdeveloped capital and credit markets in Nigeria. For example, the credit that is available is only focused at financing short-term inventories thus making it difficult for multinational firms to expand their investments in Nigeria. Even though Nigerian government has made efforts to streamline sources of finance by establishing development finance institutions (DFI), high level of corruption and inadequate funds have negatively affected the operations of DFI. Similarly, low supply of loanable funds in Nigeria is a major threat that is not only hindering the expansion of local investors but also foreign firms. Currency risk Taking into consideration the variations that exist between currencies of different countries, it is essential for companies particularly those focused at going global to consider currency risks that may interfere with revenue generation for the company. Additionally, analyzing of currency assists the company in determining the most appropriate market to sell its products. Nigeria currency is known as naira. To ensure money supply is under control, Nigeria government gives the Central Bank of Nigeria (CBN) the role of regulating money supply. However, despite its efforts of ensuring that prices of the commodities are closely monitored, the country continues to experience high rate of inflation. For example, in 2011 the inflation rate stood at 13.7%. As compared to the US dollar, Nigeria currency has less value. This implies that our company needs fewer US dollars in order to purchase raw materials and other products from the Nigeria market. On the other hand, Nigeria economy will benefit through the increased inflow of American dollar in the Nigeria market. Despite the high revenue obtained by the government from the oil industry, the existence of naira has continued to generate high inflation. One of the monetary strategies that the government has adopted in 2012 to curb the rising inflation was by increasing the interest rate to 12% from 6.25% (Mishkin and Frederic, 2004). Another major cause of the decreased value of the naira was due to the decreased oil subsidies. Related to low value of naira as compared to other world currencies, is the instability in the balance of payments as well as the exchange rates. Three major economic aspects that determines the current account balance in Nigeria includes speed of remittances from the country citizens living in other countries, oil exports and the competition brought about by non-oil exports. Even though the three aspects have brought about predictable and stable financial inflows, the country balance of payment continues to undergo high level of variability based on three factors. First, oil prices have continued to be variable. Secondly, high government spending due to high payments for imports. Thirdly, uncertainties in the exchange rates have caused unstable capital flight on the country’s economy. Based on the fact that the swings experienced in the Nigeria economy are difficult to predict, they have an impact on the country exchange rate. This implies that the government must implement policies to maintain a stable exchange rate to maintain the confidence of the investors. Due to the high oil prices in the country, Nigeria economy is currently experiencing a positive surge as a result of the increased dollar earning obtained from the oil exports. In this case the government is left with an option of either placing it in the foreign earning assets or spending it after converting it into naira (Kieso et al, 2007). These are key strategies that the government can emulate to regulate the money supply. However, these monetary efforts by the CBN are hindered by high government spending that is cause an increase on the level of inflation. Telecommunication industry in Nigeria Nigerian Communication Commission (NCC) is the government body responsible for regulating telecommunication industry in Nigeria. Through full liberation and implementation of the law of competition, NCC has effectively removed the barrier to entry thus allowing more telecommunication companies to invest in the country. Some of the major players in the industry include MTN, Airtel and Globacom among others. One of the economic aspects that are experienced in the industry is stiff price wars among the competitors. Having been started by Airtel then MTN, price war is adopted by the companies to surpass each other in the market. Due to the high competition, the call rate reduced to about N15 per minute in the year 2010.As mentioned earlier, NCC has streamlined the industry by ensuring free entry. As a result new entrants have taken their position to control various segments of the industry such as data, WiMAX, GSM, CDMA as well as Equipment providers. One of the major strengths of the industry is that it has the potential to grow since large number of the citizens is not connected. As a result of the low teledencity, foreign investors have the opportunity to expand and increase their revenue by adopting adequate and effective marketing strategies. Additionally, the industry allows Foreign Direct Investment assets inflow (David, 2003). This implies that any foreign investor is equally treated thus providing a uniform ground for doing business in the country. High literacy level in Nigeria has benefited the country in the sense that majority of the people easily accept new products thus providing adequate market for telecommunication products. A major opportunity for the industry is that there is increased desire by young people to use mobile phones and broadband in schools. Secondly, the country has a stable power supply thus reducing the costs of operating thus expanding the profit margin. Thirdly, due to inadequacy of the existing telecommunication companies, there is room for investment. Recommendation Telecommunication industry in Nigeria is at it developing stage. This is mostly due to the lack of obstacles for new entrants. This implies that by introducing new products in the market, foreign companies have ample opportunities to increase their revenue and sales. Nigeria government in corroboration with other African and foreign countries have taken initiative of ensuring democracy and proper management of the country resources. In this regard, foreign firms have established their operations in the Nigeria market to capture wide market share based on the high population that acts as a source of skilled labor. To ensure research and development in the country, the government has established more than 100 universities making Nigeria to be one of the leading countries in Africa as far as provision of university education is concerned. In this regard, our company should proceed with this venture of investing in Nigeria. Based on lack of political influence on the operations of telecommunication, the establishment of liberal regulatory body (NCC) and the total deregulation of telecommunication industry, new ventures have the opportunity of establishing their operations without hindrances. Even though the country sources of finance and credit facilities have not fully developed, our company has adequate internal revenue that it can use at the initial stages before seeking for external sources of funds. I recommend the top management team in our company to invest in Nigeria, adopt a strong marketing strategies to be competitive thus putting at bay the existing competitors. In analyzing the feasibility of starting the global joint venture in Nigeria it is imperative for the management to use breakeven analysis as one of the financial analysis method. This entails amount of sales that the company needs to make in order to equalize its total costs and revenue (Timmons, 1994). The second financial analysis that I suggest the company to use is the comparative performance. This entails comparing the performance of similar firms in the industry through the use of ratios such as return on equity, return on assets and profit/earning ratio. Conclusion To increase their revenue and widen market share, local and international firms have taken initiative enter new markets characterized by stiff competition. Due to the significance of the telecommunication sector in the development of any country, it is vital for government to offer full support to companies intending to invest in the industry. This includes providing security for the company, establishing independent regulatory bodies and creating conducive business environment. It is worth to note that despite the political, economic and currency risks that exist in Nigeria, the country is a target market for majority of multinational telecommunication companies. This implies that it is upon the Nigeria government to continue initiating proper regulations that will drive the country towards political and economic stability to attract more foreign investors. References David K. (2003).USAID/Nigeria Economic Growth Activities Assessment. USAID/Nigeria SO 2 Portfolio Review 11-24. Dwivedi, N. (2001). Macroeconomics: theory and policy. New Delhi: Tata McGraw-Hill. Egan, J. (1999). Troubled Times in the Niger Delta. London: Sage. Kieso E., Weygandt, J and Warfield, D. (2007). Intermediate Accounting. Hoboken: John Wiley & Sons. Mishkin G and Frederic S. (2004). The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley. Timmons, J. (1994). New Venture Creation - Entrepreneurs for the 21st Century. Chicago: Irwin. Read More