Nigeria becomes the largest African economy

Nigeria, the USD500bn economy. According to preliminary figures released by the National Bureau of Statistics (NBS), Nigeria’s GDP post-rebasing is estimated at NGN80.2tr (USD500.4bn) at YE 2013. This compares to NGN42.4tr (USD264.5bn) under the old time series for the same period, implying an 89% increase in nominal output. On the whole, this is a positive statistical exercise allowing to capture more effectively the size of the economy, upon which government and policy makers still need to build on in order to push through key reforms and accelerate the pace of structural transformation and diversification in Nigeria. Interestingly, the base year was moved to 2010, from 1990 previously, and the NBS also shifted to the 2008 system of national accounts. • Share of services picks up… The rebasing exercise widened the scope of activities included in GDP (46 from 33), and resulted in a meaningful increase in the share of services (52.2% [at current prices] vs 29.0%) as of 2013. This adjustment was reinforced by the telecoms and information sector which saw its contribution to GDP rise to 8.7% from 0.9%, and the introduction of a motion picture, sound recording and music production (Nollywood) sector, which now represents 1.4% of GDP and was not previously captured. More significant shares of real estate were also realized. • …while the shares of agriculture and industry decline. Meanwhile, the share of agriculture actually declined post-rebasing to 21.9% at current prices from an estimate of 34.7% in 2013 under the old GDP time series. There was also a drop in the weight of the industry sector to 25.0%, from 36.3%, respectively, even though the share of manufacturing actually increased (6.8% vs 1.9%). Meanwhile, the share of crude oil and natural gas reduced from 32.4% to 14.4% on NBS figures. • Revised GPD growth estimates. The NBS indicated that real GDP growth post-rebasing is forecast at 7.41% in 2013 from 6.66% in 2012 and 5.09% in 2011. This suggests that growth last year was slightly higher than initially expected under the old time series, but lower than the previous estimate in 2011. Given the higher base in output, economic growth will probably slow going forward. However, it is still likely to remain robust given the more meaningful contribution of the fast growing services sector and lower share of the agricultural sector. • Nigeria overtakes South Africa. Nigeria is now officially the largest economy on the continent, overtaking South Africa (GDP of around USD360bn in 2013), a result that was widely expected with the completion of the GDP rebasing exercise. That said, this outcome must be nuanced since Nigeria will continue to trail South Africa over the next decades in terms of GDP per capita (USD2860 in 2013 [new time series] vs USD6950 in South Africa), basic infrastructure and electricity generation (MW4000 at best vs MW40000), institutional capacity and financial market sophistication. • Investment remains below potential. Obviously, the new GDP figures will make it increasingly harder for companies looking at Africa to overlook Nigeria, especially considering the size of the domestic market and its potential, but the main constraints on a sizeable turnaround in FDI will still persist. This includes the above-mentioned persistent energy and infrastructure bottlenecks, weak institutions and governance issues as well as the slow pace of structural reforms in the country. Addressing these shortcomings will probably have much more impact on investment than the perception that Nigeria is now a bigger economy. If anything, the implication for now is that the ratio of FDI to GDP has deteriorated to new lows (even by regional standards) of around 2%. • Capturing the informal sector. The NBS has previously stressed difficulties it had hitherto encountered in properly capturing the informal sector – which remains substantial – in the revised GDP framework. Still, the NBS intends to further consolidate its GDP metrics and factor in the informal sector more appropriately by the next rebasing scheduled for 2016. • Mixed macroeconomic ratios. Even though some macroeconomic ratios will automatically improve (public debt/GDP: 19% to 11%; fiscal deficit/GDP: 1.9% to 1.1%), others will actually deteriorate given the larger aggregate output (fiscal savings/GDP: 1.3% to 0.7%; Federal Government revenue/GDP: 8.7% to 4.6%; current account surplus/GDP: 8.1% to 4.3%). Besides, the risk is that the lower fiscal deficit and public debt ratios may be conducive for a more qualitative leg of nominal fiscal expansion at the federally consolidated level ahead of the 2015 elections. • Limited portfolio investor reaction. There was no immediate reaction in onshore assets, with the stock market closing modestly down on 7 Apr and NGN-denominated bonds trading broadly flat. The Eurobonds were marginally stronger, but this was in line with a more supportive global risk environment in recent weeks. Given the mixed shift in the macroeconomic ratios and the political and institutional risks expected over the next year, fixed income investors will probably pay less attention to the GDP dynamics, but it is possible that a number of equity investors may be positively influenced by the size of the economy or changes in income per capita and disposable income, and the effects this may have on long-term stock valuations. The recalculated figures will also enable investors to assess sectoral investment opportunities more adequately.