Nigeria: Sahel West Africa violence, minor risk compared with others

• Nigeria equities are cheap but growth is low and risks are material; we prefer Egypt in Africa or Kazakhstan in the oil exporters.
  

Sahel disruption

The Sahel region of West Africa is violently disrupted, with little prospect of resolution soon. There are multiple drivers of this: 

• Low social and economic development makes for fertile recruitment for militants;
• Militants, driven by ideology and separatism, can easily disband and regroup;
• Local governments are failing: they are either unwilling (complicit in the illicit war economy) or unable (counter-productively outsourcing security to other armed militants);
• Post-2012 agreement to resolve revolt in northern Mali (arguably the start of deadly escalation) was not implemented (creating mistrust on all sides);
• International counter-terror efforts are failing: they are too fragmented and uncoordinated (eg internationals split among UN peacekeepers – a 13,000-strong force with an unclear mission – France looking to increase resources, US reducing resources, as well as three different regional groups – the G5 Sahel Joint Force, African Union, and ECOWAS); and
• Prospect of natural resource spoils (eg uranium in Niger, oil in Chad, gold in Mali, iron and gas in Mauritania) may persistently drive competition for influence and control among international powers.

West African Sahel region natural resources

Country	Natural resources	Comment	Multinationals
Niger	Uranium, gold, phosphate, coal	3/4 of export revenues, 4th largest uranium producer globally, meets 1/3 of France demand	Areva
Chad	Oil	50% of export revenues	CNPCI, Glencore
Mali	Gold	2/3 of export revenues, 3rd largest producer in Africa	Ashanti, Anglogold
Burkina Faso	Gold	4th largest producer in Africa	Semafo
Mauritania	Iron, copper, gas	Iron, copper, and gold over 1/2 of export revenues	Kinross Gold

Source: Tellimer Research

Global emerging market precedents for disrupted neighbourhoods

There are several examples of dysfunctional neighbouring regions in emerging and frontier markets, some of which have seen much greater measurable disruption (in terms of internally displaced persons and refugees), for example:

• Bangladesh-Myanmar; 
• Colombia-Venezuela;
• Egypt-Libya; 
• Lebanon/Jordan-Syria; 
• Kenya-Somalia; 
• Pakistan-Afghanistan; 
• South Africa-Zimbabwe.

There are many transmission mechanisms of this type of dysfunction, such as the spread of the undocumented illicit economy, insecurity spillover, fiscal cost increases to cope with refugees and internally displaced persons. 

The damage to the fundamental investment case can be lasting, for example:

• Pakistan – the spillover of insecurity lasted decades; 
• Lebanon – tourism was affected directly by insecurity but also the spread of the same regional power proxy rivalry playing out in Syria; and 
• Kenya – the damage to the tourism industry has recurred at least twice and insecurity in the north has been one obstacle for the LAPSSET infrastructure project. 

Cross-border disruption in EM and FM

Country affected	Source country	Non-state actor/ conflict/ cause
Bangladesh	Myanmar	Rohingya persecution
Colombia	Venezuela	Guaido rival government claim, economic collapse
Egypt, Tunisia	Libya	GNA-LNA civil war
GCC, Iran	Iraq	Daesh, aftermath of US-Iraq wars
Kenya	Somalia, South Sudan	Al Shabab, civil war
Pakistan	Afghanistan	Taliban, US-NATO invasion
Saudi Arabia	Yemen	Civil war, Saudi-Houthi war
South Africa	Zimbabwe	Economic collapse
Turkey, Lebanon, Jordan	Syria	Asad-rebels (including Daesh), multi-party civil war
US	Mexico	Drug cartels

Source: Tellimer Research

Channels for cross-border disruption

Transmission channel	Impact
Refugees	Fiscal burden (public services)
Transport & Trade	Supply chain disruption
Insecurity	Cross-border movement of arms, radicals and mercenaries, human trafficking
Politics	Security, immigration dominate agenda, inhibit structural reform
Geopolitics	'War on terror' pretext for external military involvement
Capital inflow	Undocumented cash inflows to real estate, bank deposits

Source: Tellimer Research

Sahel implications for Nigeria investment case

The spillover of the Sahel insecurity is a possible risk for commercially sensitive parts of Nigeria (it already affects the relatively less economically productive north east). Nigeria investors are somewhat conditioned to violence (Niger Delta militants, Boko Haram, herder-farmer clashes have, over the years, already led to a high number of internally displaced persons) and tend to react only when there is a direct economic impact (ie oil output).

Overall, insecurity risk from the Sahel matters less than weak oil revenue, pressure on remittances or high inflation and a wide fiscal deficit (both of which keep policy rates too high to spur consumption and capex). 

Nigeria equities have underperformed and are cheap relative to history (20% and 30% discounts to trailing five-year median PB and PE, respectively). But growth is low with material downside risk (given the absence of structural reform and the policy priority given to stability of the multi-currency FX regime over growth) and FX rate risk is moderate (the FX reserves rebuild arguably should have been considerably greater than that seen, given several recent quarters of healthy oil revenues and capital inflows into the local currency debt market). 

Among Africa peers, we prefer Egypt. Among oil-exporter peers, we prefer Kazakhstan.

Sahel implications for listed telecom operator Sonatel

• BRVM-listed telco SNTS has 42% and 34% of its revenue from Senegal and Mali, respectively; these two countries are also the two largest in terms of profit and capex.
• The most recently reported negative impact from the Sahel disruption was a 26% drop in Mali roaming revenue in FY 18; but total roaming revenue only contributes 1% to group revenues, and growth in other sources such as Orange Money and mobile data is still in double digits. 
• At 4.2x trailing EV/EBITDA, Sonatel is trading at a 26% discount to the five-year average.