By Charlie Robertson, Global Chief Economist at Renaissance Capital.
South Africa’s GDP for 2018 was just released which shows it was Africa’s biggest economy in actual dollars (PPP dollars, which show Nigeria was the biggest in 2017 at $1.2 trillion , don’t buy you the imports you need to build an oil refinery – note that PPP dollars are NOT what puts Nigeria’s GDP at $397bn .. the $397bn figure is the exchange rate the IMF used which is different from the NAFEX rate of NGN362/$ we use).
This piece outlines the 2019-23 outlook for Nigeria – as it tries to regain the top spot.
To get real per capita GDP growth up to 4-6% (ie headline GDP growth of 7-9%) requires either
- A doubling of the oil price, or
- Industrialisation
Without it, per capita GDP growth may be around 0% which implies headline GDP rising at roughly 3% annually
To achieve industrialisation, Nigeria needs to
- Raise the adult literacy rate from 60% to 70-80% – which we think can happen from 2024 onwards. An adult literacy campaign could accelerate this – copying what the super poor, war-torn state of South Korea did in the 1950s.
- Treble electricity consumption – which we assume requires at least a doubling of the electricity tariff. Buhari’s team has not forced through any of the annual increases due since 2016. As a result, Nigeria has three times more installed generating capacity than actual distribution. We are too glib to suggest it is just about the electricity price – but a big hike will surely be part of the solution.
- Double the investment rate from 13% of GDP to 26% of GDP – or triple it, to match what Ethiopia is doing.
To double the investment rate we suggest that reforms may be needed like
- Removing the implicit fuel subsidy which costs about 0.5% of GDP. It supports consumption and not investment. Morocco after 2012, Egypt since 2014 and even the Gulf countries are cutting fuel subsidies.
- Encourage foreign direct investment, which in 2018 fell to $2.2bn according to UNCTAD. Ghana got $3bn. To match Ghana (per capita), Nigeria should be getting $24bn a year. A change of approach to MTN, the oil majors and others may be required.
- Boost domestic savings and bring down interest rates which will probably require a smaller budget deficit and higher taxes.
- Allow the currency to trade closer to fair value which we estimate today at NGN440/$, NGN470 by year-end and NGN670 by end-2023. Allowing faster currency depreciation does partly contradict point 3 on cutting interest rates. Note that in the immediate term, ahead of the CBN governor’s term expiring on 2 June, fixed income investors are probably assuming short-term currency stability, based on decent FX reserves figures (over $40bn), a current account in small surplus and high domestic interest rates. Our base case is that whoever the governor is, the currency will end-2019 at NGN395/$. We have no reason to believe that if there is a change of CBN governor, we will see an end to the multiple exchange rate regime.
The good news is that President Buhari has already declared his second term will be “tough” – so perhaps he will take his 4m vote victory margin to push through difficult reforms. The cabinet should be in place soon after the new presidential term starts on 29 May – unlike 2015 where it took six months. There should be less of a learning curve than we saw in 2015-17.
The precedent of 2015-19 tells us equity investors will not assume rapid, deep reforms. Even if nationwide progress is hard to achieve, we may see localised success stories, such as in Lagos – which has the biggest adult population of any state in Nigeria, high adult literacy (over 80%) and is now planning to get 3GW of electricity over the next few years (total nationwide distribution is around 4GW).
Lastly – we cross-checked population data against voting data because we doubted our initial estimates that there were 22% more adult voters in Nasarawa state than adults. We ended up agreeing with local and IMF estimates of the population being around 194m in 2018 and perhaps 199m in 2019. We even ended up agreeing with a recent Economist article that the 200 millionth Nigerian may be born in 2019. We can go into more detail on specific voting data for various states if you’re interested in pursuing this.
Our top three local debt picks remain Argentina, Turkey and Egypt. Our equity strategist has Nigeria on neutral. With some rapid reforms, a better value currency, accelerating growth – Nigeria could become an overweight again.
