NEWS - Nigeria economic growth

• Nigeria’s economy is likely to significantly exceed $250bn after it is rebased. Nigeria’s statistics office plans to rebase the country’s GDP from 1990 to 2008. Most countries rebase their GDP on a regular basis (usually every five years in the West) to account for changes in production and consumption. We think the most obvious change in Nigeria is the sharp rise of the telecommunications industry over the past two decades. We expect the rebasing of Nigeria’s GDP to result in a significant upward revision, à la Ghana. Notably, according to the IMF, the size of Nigeria’s economy this year ($247bn) is projected to surpass that of Egypt’s ($232bn) and become Africa’s second-largest economy in terms of GDP, behind SA (see Figure 1). In our view, the rebasing of Nigeria’s GDP, which is due to be announced in early 2012, will entrench Nigeria as the continent’s second-largest economy. We see the likely upward revision of GDP as affirming the country’s attractiveness as an investment destination, in addition to the increasing opportunities outside the hydrocarbons sector, such as its growing middle class, which is positive for consumer stocks. Moreover, a bigger economy growing at a high-single-digit rate implies the size of Nigeria’s economy could surpass that of SA sooner than previously expected.
• The structure of the economy is likely to change – agriculture will shrink and services swell. Output from Nigeria’s agriculture sector presently accounts for around 40% of overall GDP, one of the highest ratios in Africa. While the agriculture sector is likely to remain a significant economic provider, we expect the rebased GDP numbers to reveal a smaller contribution. The services sector, which under the current base year produces one-third of GDP, is likely to increase as a share of GDP, in our view. In particular, we expect the contribution from the telecommunications and financial services sectors, which each provide 4% of GDP, to increase, reflecting their growing significance in the Nigerian economy over the past two decades.
• Some ratios will improve, such as the budget deficit/GDP and public debt/GDP... One of Finance Minister Ngozi Okonjo-Iweala’s immediate challenges is to reduce the budget deficit, following its significant deterioration in 2009 and 2010 to 10.2% and 8.5% of GDP, respectively, from a surplus in 2008, according to the IMF. An upward revision in Nigeria’s GDP could help her achieve that objective by cosmetically reducing the budget deficit/GDP ratio. A bigger GDP will give the finance minister the room to step up Nigeria’s capital expenditure plan, particularly for infrastructure projects, without compromising the medium-term fiscal consolidation plans. Nigeria’s relatively low public debt/GDP ratio, which is currently in the high teens, is expected to drop even further following the rebasing, making Nigeria’s government one of the least leveraged in the world, especially compared with overleveraged Europe.
• ...but the current account surplus/GDP will narrow and fiscal revenue/GDP will fall. In 2010, Nigeria’s current account surplus/GDP ratio dropped into the single digits, from low double digits, partially due to a surge in import demand. The drop in FX reserves in the same year reflected the narrowing of the current account surplus. A bigger GDP implies that there is a lower probability of the current account surplus/GDP ratio returning to double digits. But as long as the current account balance is positive, this will be favourable for Nigeria’s external sector position. However, a decline in the fiscal revenue/GDP ratio, which as a percentage is currently in the early 20s, may suggest underperforming revenue collections, particularly of non-oil and non-tax revenue.